Costing Techniques
Introduction:
Maximization of firm’s wealth is the utmost motive of any manager. In order to achieve this, calculation and control of cost of the product is necessary. Even, to survive in todays very competitive market cost controlling measures are very necessary. Cost of a product means the cost incurred on different elements such as material, labour and expenses. These elements may be related to the product either directly or indirectly. Based on utility, the classification of costs can be direct and indirect costs; controllable and uncontrollable costs; fixed, variable and semi-variable costs; differential incremental or decremental costs; opportunity costs etc. In the managerial decision making process, each classification has its own importance. Many costing techniques evolved in due course of time to ascertain the costs of above elements and to facilitate the control of the cost of the product. The main costing techniques that evolved include Absorption Cost Technique, Marginal Cost Technique and recently developed Activity Based Costing Technique.
The purpose of this paper is to analyse the Absorption Cost Technique and Activity Based Costing Technique and to highlight their basic differences. With the help of this the relative merits of each technique over the other can be critically examined so that, to conclude which technique is suitable for which circumstance.
Costing of a product:
Generally, the costing of product involves these following steps:
1. Identification of the cost object i.e. is anything that a manger want to know the cost of. That may be the cost of producting 1 No. product, or of a particular day’s production etc. 2. Identification of the direct costs which are directly related the cost object.Materials and labor that are directly related with the cost object are the direct cost for manufacturing companies. Thus, direct materials are those which become part and can be economically and comfortably identified with the
Maximization of firm’s wealth is the utmost motive of any manager. In order to achieve this, calculation and control of cost of the product is necessary. Even, to survive in todays very competitive market cost controlling measures are very necessary. Cost of a product means the cost incurred on different elements such as material, labour and expenses. These elements may be related to the product either directly or indirectly. Based on utility, the classification of costs can be direct and indirect costs; controllable and uncontrollable costs; fixed, variable and semi-variable costs; differential incremental or decremental costs; opportunity costs etc. In the managerial decision making process, each classification has its own importance. Many costing techniques evolved in due course of time to ascertain the costs of above elements and to facilitate the control of the cost of the product. The main costing techniques that evolved include Absorption Cost Technique, Marginal Cost Technique and recently developed Activity Based Costing Technique.
The purpose of this paper is to analyse the Absorption Cost Technique and Activity Based Costing Technique and to highlight their basic differences. With the help of this the relative merits of each technique over the other can be critically examined so that, to conclude which technique is suitable for which circumstance.
Costing of a product:
Generally, the costing of product involves these following steps:
1. Identification of the cost object i.e. is anything that a manger want to know the cost of. That may be the cost of producting 1 No. product, or of a particular day’s production etc. 2. Identification of the direct costs which are directly related the cost object.Materials and labor that are directly related with the cost object are the direct cost for manufacturing companies. Thus, direct materials are those which become part and can be economically and comfortably identified with the
Bibliography: • Kaplan Robert and Atkinson Anthony," Advanced Management Accounting", New Delhi, Prentice Hall of India,1998. • www.cashfocus.com • www.praport.com