ByM Preethi Bhavani

G Shravya ReddyB Rajesh Reddy

Nikhileshwar Rao

TECHNIQUES OF COSTING

What is a Technique?

Technique refers to the manner of ascertaining costs of a

product, job or activity.

These are strategies which can be adopted to ensure that the

cost of product is reduced.

The following are the techniques adopted by the strategic

management accountant.

Types of techniques

Marginal costing

Budgetary control

Standard costing

Activity base costing

Responsibility accounting

MARGINAL COSTING

Marginal cost – cost of producing an

additional unit or output or service

Marginal costing differentiates the

fixed and variable costs

Marginal cost is defined as the

amount at any given volume of

output by which aggregate costs are

changed if the volume of output is

increased or decreased by one unit.

Features Of Marginal Costing

Semi-variable costs are included in comparison of

cost

Only variable costs are considered

Fixed costs are written off

Prices are based on variable and marginal

contribution

Basic equation of Marginal Costing

Profit = Sales – Total cost

Profit = Sales – (Variable cost + Fixed cost)

Profit + Fixed cost = Sales – Variable cost

Sales – Variable cost = Contribution = Fixed cost +

Profit

Contribution – Fixed cost = Profit

BUDGETARY CONTROL

Budget: Budget is a financial and /or

quantitative statement, prepared and

approved prior to a defined period of

time of the policy to be pursued

during that period for the purpose of

attaining a given objective.

BUDGETARY CONTROL

Budgetary Control: A control technique whereby actual results are compared with budgets.

A strategy to control the expenditure of a firm.

Features

Objectives

Activities

Plans

Performance Evaluation

Control Action

Advantages

Definition of goals

Defining Responsibilities

Basis for performance evaluation

Optimum use of resources

Co-ordination

Planned Action

Limitations

Estimates

Rigidity

False Sense of Security

Lack of co-ordination

Time and cost

STANDARD COST

The word standard means a norm or criterion.

Standard cost is used to measure the efficiency with

which actual cost has been incurred.

Steps in standard costing

Setting of standard costs for different elements of costs.

Ascertaining actual costs. Comparing standard with actual costs to determine

the differences between the two, known as ‘variances’.

Analyzing variances for ascertaining reasons thereof. Reporting of these variances and analysis thereof to

management for appropriate action, where necessary.

Advantages

• Effective cost control : The most important

advantage of standard costing is that it facilitates the

control of costs.

• Help in planning : Establishing standards is a very

useful exercise in business planning with instills in

the management a habit of thinking in advance.

Disadvantages

• The system may not be appropriate to the business.

• The staff may not be capable of operating the

system.

• These are expensive and unsuitable in job order

industries.

ACTIVITY BASED COSTING

Activity based costing is that costing in which costs are first traced to activities and then to products.

Activities become the focal points for cost accumulation.

The factors which determine the costs of activities are called Cost Drivers

Possible Cost Drivers

Machine hours

Direct labor hours

Number of setups

Number of products

Number of purchase orders

Number of employees

Number of square feet

Common Classification System

Unit-level activities. Activities performed for each unit of

production.

Batch-level activities. Activities performed for each of

batch of products.

Product-level activities. Activities performed in support of

an entire product line.

Facility-level activities. Activities required to sustain an

entire production process.

When is ABC Most Useful?

High amounts of overhead cost Multiple products Complex products Complex production system Significant variation in volume between high and low

volume products Different products place different demands on resources Problems with current cost allocations due to changes in

products or processes Better cost information is needed

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RESPONSIBILITY ACCOUNTING

Responsibility accounting is based on the assumption that every cost incurred must be the responsibility of one person somewhere in the company.

Example

The cost of rent can be assigned to the person who negotiates and signs the lease, while the cost of an employee’s salary is the responsibility of that person’s direct manager.

This concept also applies to the cost of products, for each component part has a standard cost (as listed in the item master and bill of materials), which it is the responsibility of the purchasing manager to obtain at the correct price.

Similarly, scrap costs incurred at a machine are the responsibility of the shift manager.

By using this approach, cost reports can be tailored for each recipient.