## Costing Methods & Important Cost Terms

24, Sep 2017

Costs can be simply defined as the money or resources associated with a purchase / business transaction or any other activity. Different industries adopt different methods of ascertaining costs of their products depending on the nature of the production and the type of output.

Cost sheet is the statement that shows various components of total cost of a product. It indicates per unit cost in addition to total cost. Cost sheet is prepared on the basis of historical cost and estimated cost.

1. ## Fixed cost:

Fixed costs are those costs that do not vary with respect to changes in output and would accrue even if no output was produced. E.g. Rent, interest payments, property taxes and employee salaries. However, fixed costs are restricted to specific time frame, since over the long run fixed costs can vary. For example, a manufacturer may decide to expand capacity in tandem to the increase in demand for its product, requiring a higher level of expenditure on plant and equipment.

2. ## Variable Cost:

Variable cost changes proportionately to the level of output. For manufacturers, the key variable cost is the cost of materials.

3. ## Total Cost:

It is defined as the sum of fixed, variable and semi variable costs.

4. ## Direct and Indirect cost:

Direct costs typically include the major components for manufacturing goods and the labor directly required to produce those goods. Direct costs are also referred to as prime costs. On the other hand, indirect costs include plant-wide costs such as those resulting from the use of energy and fixed capital. Indirect costs are also referred to as overhead.

5. ## Incremental cost:

It is mainly the extra cost associated with manufacturing one additional unit of production. It is also referred to as differential cost.

6. ## Opportunity Cost:

It is defined as the cost of an alternative that is forgone (benefit, profit, value given up) in order to pursue a certain action.

7. ## Sunk Cost:

It is the cost that is already incurred and cannot be recovered.

1. ## Marginal Costing:

Through this method only the variable cost is allocated i.e. direct materials, direct expenses, direct labour and variable overheads to production. It does not include the fixed cost of production.

2. ## Absorption Costing:

It is the technique to absorb the fixed and variable costs to production. In this method, full costs i.e. fixed and variable costs are absorbed to the production.

3. ## Standard Costing:

When the costs are predetermined on certain standards in a given set of operating conditions, it is called standard costing.

4. ## Historical Costing:

In this method the costs are determined in terms of actual costs and not predetermined standard costs. Costs are determined only after it is incurred. Almost all organizations adopt this method of costing.

## Unit costing:

It is also called the single output costing. It is used in costing of products that are expressed in identical units and suitable for products that are manufactured by continuous activity.

Example: Cement manufacturing, Dairy, Mining etc.

## Job costing:

Under this method, costs are ascertained for each work order separately as each has its own specification and scope. Tailor made products also get covered by this type of costing.

Example: Repair of buildings, Painting etc

## Contract costing:

In this method costing is done for jobs that involve heavy expenditure and stretches over long period and across different sites. It is also called as terminal costing.

Example: Construction of roads and bridges, buildings etc

## Batch costing:

Through this method the costing is done for units that are produced in batches that are uniform in nature and design.

Example: Pharmaceuticals

## Process costing:

It is used for the products which go through different processes. Like in the process of manufacturing cloth, different processes are involved namely spinning, weaving and finished product. Each process gives an output that is a finished product in itself and can be sold. That is why; process costing is used to ascertain the cost of each stage of production.

## Service or operating costing:

It is the method used for the costing of operating a service such as Public Bus, Railways, Nursing home. It is used to ascertain the cost of a particular service.

## Multiple costing:

When the output comprises different assembled parts like in televisions, cars or electronic gadgets, cost has to be ascertained for the component as well as the finished product. Such costing may involve different / multiple methods of costing.

## Product Costing:

Product costing methods are used to assign cost to a manufactured product. The main costing methods available are process costing, job costing and direct costing. Each of these methods apply to different production and decision environments.

The main product costing methods are:

• Job costing:This is the assignment of costs to a specific manufacturing job. This method is used when individual products or batches of products are unique, and especially when jobs are being billed directly to customers or are likely to be audited by customers.

• Process costing:This is the accumulation of labor, material and overhead costs across departments or entities, with the total production cost then being allocated to individual units. Process costing is used when large quantities of the same product are manufactured, usually in long production runs.

## Inventory Costing:

Different inventory costing methods are best suited to different situations and financial goals.

• ## First In, First Out

Under the First In, First Out (FIFO) method, the oldest costs are assigned to inventory items sold, regardless of whether the sold items were actually purchased at that cost. When the number of inventory items purchased at the oldest cost is sold, the next oldest cost is assigned to sales.

• ## Last In, First Out

The last in, first out method (LIFO) is the exact opposite of the FIFO method, assigning the most recent inventory costs to items sold

• ## Average Cost Method

The average cost method assigns inventory costs by calculating a moving average of all inventory purchase costs.

• ## Specific Identification Method

The specific identification method perfectly matches inventory costs with units sold, assigning the exact cost of each sold inventory item when the specific item is sold.

## TRADITIONAL METHODS: PROCESS AND JOB-ORDER COSTING:

There are two conventional costing approaches used in manufacturing, namely process and job order costing. Process costing method analyzes the net cost of a manufacturing process. Since most manufacturing processes involve more than one step, calculation is made for each step to arrive at a unit cost average for the entire production system.

The second major costing method, job-order costing, involves costing based on an individual product basis. This is useful where each unit of production is customized or where there are very few units produced. Under this method, the exact costs incurred in the production of a particular unit are calculated and are not necessarily averaged with those of any other unit, since every unit may be different.

## ACTIVITY-BASED COSTING:

Activity-based costing (ABC) is a secondary / somewhat complementary method to the two traditional costing techniques.

While traditional methods classify costs into categories like direct materials, labor and other overheads, ABC considers all the costs associated with a single manufacturing task, regardless of whether they fall under the headings of labor or materials or something else. The benefit of this method is that management can keep track of tasks that cost the most versus which add the most value; indicating any disproportionate amount of money being spent on low-value activities, thereby indicating the need for process change.

## Steps for Performing ABC:

1. Analyze the Activities
2. Gather all the Costs
3. Trace Costs to the Activities
4. Set up Output Measures
5. Analyze the Costs

## Features of ABC:

• Indicates High Cost activities
• Helps in establishing and monitoring performance measures
• Is useful for forecasting financial baselines
• Captures the current cost of performing any activity

Costing is a topic majorly covered in courses related to accounting. There are specific specialized courses in costing and management accounting that covers the topic in depth. These courses train the candidate on the industry-relevant skills imparting the required and in-demand skills and knowledge used on the job.

Some of the professional courses that cover costing as a major topic are:

## US CMA – Certified Management Accountant

US CMA is offered by an institute based in the United States. US CMA is a globally recognized qualification and one of the top courses for mastering Management Accounting.

For Us CMA details like US CMA eligibility, US CMA duration, US CMA fees, US CMA scope read more

## US CPA – Certified Public Accountant

US CPA is another course that provides global recognition to the candidates. US CPA is offered by an institute based in the United States. The course covers overall accounting topics apart from cost.

For Us CPA details like US CPA eligibility, US CPA duration, US CPA fees, US CPA scope read more

## CA – Chartered Accountant

Chartered Accountant course is offered by the Indian Institute and provides you recognition within the country only since it covers the Indian Accounting Standards rather than the International Accounting Standards.

EduPristine provides free career counseling to students who want to pursue a career in accounting and finance. To learn more about the various courses, book an appointment now.

## Conclusion:

With the increasing changes in the industries and complexities of businesses, costing becomes important for managements to take appropriate decisions, planning and control and having effective cost management measures in place.

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04, Jan 2022
##### What are The Top Skills a Commerce Student Must Have?
Hey there! So good to have you back again. Did you know companies are more inclined towards selecting candidates who Read More
03, Jan 2022
##### What are the Benefits of Learning Financial Modeling?
Do you ever wonder what does a Financial Modeler do? Some of you might also want to become a successful Read More
21, Oct 2021
##### What is the difference between ACCA and CPA?
Accounting is a field that has endless job opportunities. It is the backbone of an organization. Be it any industry, Read More
21, Sep 2021
##### 5 Reasons why you should pursue the CPA course after CA
CPA course, also known as Certified Public Accountant (CPA), is a globally recognized designation and is the highest standard of Read More
21, Oct 2020
##### How Opting for Full-Time Level I CFA Course Gives You an Edge Over Others
Chartered Financial Analyst (CFA course) is one of the most in-demand certifications in the field of finance and provides lucrative Read More
22, Aug 2020
##### A Complete Guide on ACCA Course Eligibility, Duration, Registration, Fees, Etc.
Why the ACCA course? ACCA is a global professional accounting body offering the Chartered Certified Accountant qualification (ACCA) and is Read More
17, Aug 2020
##### CPA Exam Registrations and Scheduling in India
CPA Exam Registration CPA stands for Certified Public Accountant and is one of the major certification courses in the field Read More
18, May 2020
##### What is Soft Skill Training ?
What is Soft Skill Training With the evolution of the business and client servicing industry, soft skills have started gaining Read More
03, Oct 2019
##### What is Finance: Types of Finance and Financial Instruments?
Finance is a major and vast topic to cover. Accounting and Finance are often used together, and some even deem Read More
10, Sep 2019
##### All you want to know about Chartered Accountant (CA)
Here's what you need to get started with the Chartered Accountant (CA) course Chartered Accountant is an honorable designation that Read More
03, Jul 2019
##### Soft Skills For The Hard World
Soft Skills Training - Reality Check: Whether we'™re talking in a team meeting or presenting in front of an audience, Read More
26, May 2019
##### What is the Importance Of Relative Valuation
Relative Valuation Generally speaking, ‘valuation’ can be defined as the process for finding the ‘value’ of anything. In the world Read More
19, May 2019
##### Ratio Analysis – Ratios Formulae
Ratio analysis'”the foundation of fundamental analysis'”helps to gain a deeper insight into the financial health and the current and probable Read More
20, Apr 2019
##### Excel Tricks: Text Functions in Excel
How to use Text Functions in Excel   Excel is mostly about the numerical data, but at times you can Read More
10, Apr 2019
##### Explore the Top 12 Opportunities Which Will Take Your Career to the Next Levet [2020 – 2021]]
While writing the last paper of your final B.Com exam, a plethora of thoughts go through your mind. A lot Read More
28, Oct 2018
##### Top 10 Accounting Firms
Over the years, the way of doing business has changed significantly. There are a number of factors which have contributed Read More
10, Oct 2018
##### Everything you want to know about the CMA certification
CMA Full Form: Certified Management Accountant (CMA) Going for the CMA certification is a great career move, especially when you Read More
06, Aug 2018
##### SAP certification – examination, eligibility and benefits
SAP certification help validate the expertise and experience of SAP partners, software users, customers and professionals who are looking to Read More
03, Aug 2018
##### Root Cause Analysis
As the name suggests, Root Cause Analysis deals with identifying the origin of a problem and finding a solution for Read More
26, Jun 2018
##### Principles and Fundamental Concepts of Basic accounting
Accounting is extremely popular as the language of business language. Through this language, it is easy to analyze the financial Read More
04, Jun 2018
##### Know how to understand and interpret cash flow statement
A cash flow statement is essential to any business as it can be the basis of budgeting by assessing the Read More
29, Mar 2018
##### ALL YOU WANT TO KNOW ABOUT SENSITIVITY ANALYSIS
ALL YOU WANT TO KNOW ABOUT SENSITIVITY ANALYSIS The Crucial Role of Sensitivity Analysis: Hey there, so good to have Read More
24, Mar 2018
##### ACCA Full Form
ACCA - Association of Chartered Certified Accountants The role of strategic academic guidance in the life of a student is Read More
25, Feb 2018
##### Finding and Removing Duplicates in Excel
Did you ever come across a situation wherein, you see a lot of copied data or duplicates in excel and Read More
07, Feb 2018
##### Capital Budgeting: Techniques & Importance
In our last article, we talked about the Basics of Capital Budgeting, which covered the meaning, features and Capital Budgeting Read More
14, Jan 2018
11, Jan 2018
##### Amalgamation Explained in detail
AMALGAMATION EXPLAINED IN DETAIL Understanding Amalgamation: Exploring the Dynamics of Corporate Unions Have you ever wondered what truly defines the Read More
08, Jan 2018
##### Working Capital Management
What is Working Capital Management? Traditionally, investors, creditors and bankers have considered working capital as a critical element to watch, Read More
30, Dec 2017
##### Statistical Functions in Excel
People usually have love-hate relationship with statistics. When you get your formulas right you are in love with it and Read More
07, Dec 2017
##### Venture Capital
VENTURE CAPITAL Unlocking the power of Venture Capital: Features, Financing Methods, and Opportunities Hey there, so good to have you Read More
02, Dec 2017
##### Financial Reporting
In any industry, whether manufacturing or service, we have multiple departments, which function day in day out to achieve organizational Read More
09, Nov 2017
##### Cell References in Excel
While using excel, there may be times when you want to keep the values same while copying formulas. This can Read More
24, Sep 2017
##### Costing Methods & Important Cost Terms
Costs can be simply defined as the money or resources associated with a purchase / business transaction or any other Read More
25, Aug 2017
##### Balance sheet explained in detail
What is Balance Sheet? A balance sheet (also called the statement of financial position), can be defined as a statement Read More
15, Jul 2017
##### Cash Flow Statement
CASH IS KING;is a known fact, that it is the basis of any business. No bills, employees or for that Read More
08, Jul 2017
##### What are the career options after Mcom
Master of Commerce or M Com is a postgraduate Master Degree which specializes in commerce, accounting, management and economics related Read More
07, Jun 2017
##### What is Standard Deviation?
Standard Deviation Definition Standard Deviation is a statistical term used to measure the amount of variability or dispersion around an Read More
21, Apr 2017
##### Know how effective is CMA course compared to MBA in providing a dream job
There are various industries and sectors out there where you can grow and enhance your career. Management, Accounting, Finance, Engineering, Read More
02, Mar 2017
##### ACCA Exam Structure and Pattern
ACCA doesn't have a single definite pattern for all of its exams. Broadly the entire ACCA Exam Structure and Pattern Read More
22, Feb 2017
##### Comparison of CPA course with other courses
The Accounting industry offers you various opportunities to learn via various courses. You can choose which one suits your academic Read More
08, Feb 2017
##### Advantages and Application Process of FRM
FRM (Financial Risk Manager) Certification gives you a distinctive edge from the other risk management professionals operating in the Finance Read More
03, Jan 2017
##### An insight into OTC Derivatives
What is Derivatives? Derivatives are defined as the type of security in which the price of the security depends/is derived Read More
03, Oct 2016
##### CPA Course Syllabus – Topics and Importance
A CPA requires a broad spectrum of knowledge and proficiency in it. The purpose of CPA exam syllabus is to Read More
07, Jun 2016
##### CFA® Study Planner
Most of the CFA® pursuers believe that CFA® Program tests are very difficult and arduous but that is not the Read More
03, Jun 2016
##### CPA Course details, application fees and benefits of doing it
A Certified Public Accountant (CPA) is the highest standard of competence in the field of Accountancy across the globe. The Read More
31, May 2016
##### All Important About CFA® LEVEL 1 Syllabus
CFA® charter is one of the most exalted credentials of those who work in the financial sector or who make Read More
18, Jan 2016
What is a Portfolio? A portfolio can be defined as different investments tools namely stocks, shares, mutual funds, bonds, cash Read More
25, Nov 2015
##### Cost Management: Meaning, Techniques & Advantages
What is Cost? Cost is defined as the monetary valuation of effort, material, resources, time consumed, risk and opportunity forgone Read More
19, Oct 2015
##### How to get into Big 4 Accounting Firms?
We all have some career objectives and aspirations. For higher studies like MBA, CA, CPA, ACCA, CFA etc. one has Read More
13, Oct 2015
##### FRM Question Bank
For every exam, time management is very important and everyone wants a precise course content in a prioritized manner along Read More
29, Sep 2015
##### Top 10 Companies that hire CFA® Charterholders
A lot of hardwork and investment is required to prefix the words CFA® Program before your name and time and Read More
18, Aug 2015
##### Income Statement in detail
WHAT IS INCOME STATEMENT? The income statement is one of the important primary financial statements provided by organizations. It presents Read More
12, Aug 2015
A business analyst's role in an IT project is to ensure that all requirements of the client are captured and Read More
03, Aug 2015
##### Annual Report
What is an Annual Report: The single source of getting information about any company whether it is the past or Read More
01, Jul 2015
##### Capital Budgeting
WHAT IS CAPITAL BUDGETING? Capital budgeting is a company’s formal process used for evaluating potential expenditures or investments that are Read More
16, Jun 2015
##### Mergers and Acquisitions
What is Mergers & Acquisitions? Mergers and acquisitions (M&A) are defined as consolidation of companies. Differentiating the two terms, Mergers Read More
15, Jun 2015
##### Detecting Multicollinearity
"In my previous blog “ How to deal with Multicollinearity ”, I theoretically discussed about definition of multicollinearity and what Read More
26, May 2015
##### Analysis of Financial Statement of a Company
One of the major aspects while taking a right investment decision is to analyze the financial statements of any company. Read More
24, Mar 2015
##### 8 Excel functions that every Data Analyst must know
Are you a data analyst or looking for a career as a data analyst??? Well then, today's article is dedicated Read More
24, Mar 2015
##### Duckworth-Lewis Method
Duckworth-Lewis method(D/L method) is a mathematical function defined to set and calculate the target score for the team batting second Read More
28, Feb 2015
##### 6 Most Common Excel Errors
Hashtags look cool when seen on Twitter or Facebook but as soon as they start appearing in Excel sheet, you Read More
23, Feb 2015
##### Rule Precedence in Conditional Formatting
Conditional Formatting in Excel makes the things easier and user friendly, but at times it may also make it quite Read More
10, Dec 2014
##### Types of Investment Banking jobs
Investment banking is one of the most attractive industry to work in. not only for people with formal education in Read More
29, Aug 2014
##### FRM Part 1 syllabus
Shut your doors, drop the drapes on your windows and don't bother looking at the clock because it's always the Read More
20, Aug 2014
##### Ratio Analysis – Introduction
Introduction The term 'ratio analysis'refers to the analysis of the financial statements in conjunction with the interpretations of financial results Read More
20, Aug 2014
##### Ratio Analysis – Classification of ratios and Liquidity Ratio
In our previous blog post we discussed ratio analysis. In this blog post we will explain classification of ratios and Read More
23, May 2014
##### Bootstrapping Solution
What is the Bootstrapping method? Bootstrapping is a method for constructing a zero-coupon yield curve from the prices of a Read More
13, Nov 2013
##### Dell’s Leveraged Buyout: A Real-life Case Study
Acquisitions Acquisitions or takeovers are a transaction or process wherein one company (commonly called as acquirer) or an investor acquires Read More
08, Aug 2013
##### Cash Flow Statement: Learn to create Cash Flow Statement Template in Excel
What is a Cash Flow Statement? In financial accounting, a Cash Flow Statement, also known as Statement of Cash Flow, Read More
07, Feb 2010
##### CFA® Program from ICFAI (India) Vs CFA® Program from CFAI (US)
You have decided that you are going to pursue CFA & reg; but now the question that arises is, whether Read More