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Costing Methods

**What are the methods and techniques of costing? **

According to the difference in nature, Industries follows different type of costing method.

The methods of costing are given as follow:

A. Job Costing: In this method cost is ascertained according to their Job. For each job cost is ascertained separately.

Example: Printing press, Advertisement.

B. Batch Costing: Each batch is considered as a unit of cost and cost for each batch is separately calculated. In this costing method cost per unit is calculated by dividing the cost of the batch by the number of units produced in each batch. In this costing system cost can be charged directly to a group of product.Sometimes a batch may also represent a number of small orders passed through the factory in a form of batch.

C. Contract Costing: In this method cost of each contract is ascertained separately. This costing is similar to Job Costing the only difference is the job in contact costing is larger than job costing.

Example: Real Estate Industry

D. Single or Output Costing:In this method cost of product is ascertained considering the product being the only one product.

Example: Cold Drink Industry

E. Process Costing: Process costing is used for ascertaining the cost of completing each stage of work.

Example: Sugar Industry

F. Operating costing: In this method cost of each operation is ascertained separately.This costing is used where services are rendered.

Example: Hospitals

G. Multiple costing: Multiple costing is a method of ascertaining cost by using combination of two or more method outlined above.

Example: Car Assembly

**Technique of Costing are:**

A. Uniform Costing: When a number of firm in an Industry follow the same system of costing, principle and practices they are said to be following Uniform Costing. The idea behind uniform costing is that different concerns in an industry must adopt a common method and technique of costing and apply uniformly the same principles and techniques for enhancedcost comparison.

B. Marginal Costing: Marginal costing is known as ascertainment of marginal costing by differentiating between fixed and variable cost. In this costing variable cost are charged directly to cost units and fixed costs are written off in full against the total contribution.

C. Standard Costing: It is a technique which helps in determining Standard Cost. And compared the standard cost with the recorded actual costs. Standard Costing is a technique of cost ascertainment and cost control is also possible with the help of standard costing.

D. Historical Costing: Historical Costing is ascertainment of cost after the cost has been incurred.

E. Direct Costing: It is a technique of ascertaining all direct cost to the operation.

F. Absorption Costing: It is the process of charging all cost including variable and fixed to operations, processes or products. This costing is different from Marginal Costing as in Marginal Costing Fixed costs are excluded.

**What are the different types of costing? **

The different type of costing are:

A. Uniform Costing: In this Costing method standardized principle and practices of costing are used by a number of different industries.

B. Marginal Costing: In this costing method, only variable cost and cost which are directly linked are charged to the product or process.

C. Standard Costing: Standard costing are used to compare with the actual cost and to determine variances.

D. Historical Costing: It is the type of costing which is used for recording the cost which has already incurred.

E. Direct Costing: Direct Costing is used to charge the direct cost to the product or process.

F. Absorption Costing: In absorption costing all cost including variable and fixed are charged to the product or process.

1.costing formulas:

Marginal Costing:

Statement of Profit

Particulars |
Amount |

Sales |
*** |

Less: Variable Cost |
*** |

Contribution |
*** |

Less: Fixed Cost |
*** |

Profit |
*** |

A. Sales=Total Cost+ Profit=Variable Cost+ Fixed Cost+ Profit

Where, Total Cost= Variable Cost+ Fixed Cost

B. Profit Volume Ratio:

i. (Contribution/sale)*100

ii. (Contribution per unit/Sales per unit)*100

iii. (Change in Profit/Change in Sales)*100

iv. (Change in Contribution/Change in Sales)*100

C. Break Even Point:

i. Fixed Cost/Contribution per unit (in unit)

ii. Fixed Cost/PV Ratio (In Value)

D. Margin of Safety Ratio:

i. Actual Sale-Break Even Sale

ii. Net Profit/ Profit Volume Ratio

iii. Profit/Contribution per Unit (in units)

iv. Sales unit at Desired profit=(Fixed cost+ Desired profit)/contribution for eachunit

v. Sales value for desired profit+(Fixed cost+ Desired profit)/Profit Volume Ratio

vi. At Break Even Point Contribution=Fixed Cost

Variable cost Ratio=(change in total cost/change in total sale)*100

vii. Indifference point=At which point two product sales results in same profit

= (Change in fixed cost/ change in variable cost for each unit)[in units]

=(Change in fixed cost/change in contribution for each unit)[in units]

= (Change in Fixed Cost/Change in P/V Ratio)[Rs]

viii. Shut down point=Point at which each of division or product can be closed

=Maximum or specific or Available fixed cost/PV ratio or Contribution per unit.

If sale is less than shut down point than that product is to be shut down.

Standard Costing:

Material:

1. |
Material Cost variance |
= |
SP*SQ-AP*AQ |

2. |
Material Price Variance |
= |
SP*AQ-AP*AQ |

3. |
Material Usage Variance |
= |
SP*SQ-SP*AQ |

4. |
Material Mix Variance |
= |
SP*RAQ-SP*AQ |

5. |
Material Yield Variance |
= |
SP*SQ-SP*RAQ |

6. |
Material Purchase Price Variance |
= |
SP*PQ-AP*PQ |

(Where SP=Standard Price, SQ=Standard Quantity, AP=Actual Price, AQ=Actual Quantity, RAQ=Revised Actual Quantity, PQ=Purchase Quantity)

Labor:

1. |
Labor Cost Variance |
= |
SR*SH-AR*AH |

2. |
Labor Rate Variance |
= |
SR*AH(paid)-AR*AH |

3. |
Labor Efficiency Variance |
= |
SH*SR-SR*AH(worked) |

4. |
Labor Mix Variance |
= |
SR*RAH-SR*AH(worked) |

5. |
Labor Yield Variance |
= |
SH*SR-RAH*SR |

6. |
Labor Idle Time Variance |
= |
SR*AH(paid)-SR*AH(worked) |

(Where SR=Standard Rate, SH=Standard Hour, AR=Actual Rate, AH=Actual Hour, RAH=Revised Actual Hour)

Variable Overhead Cost Variance:

1. |
Variable Overhead Cost Variance |
= |
SR*ST-AR*AT |

2. |
Variable overhead Expenditure Variance |
= |
SR*AT-AR*AT |

3. |
Variable Overhead Efficiency Variance |
= |
AR*ST-SR*AT |

(Where, SR=Standard Rate/per Hour )

Fixed Overhead Cost Variance:

1. |
Fixed Overhead Cost Variance |
= |
SR*ST-AR*AT (paid) |

2. |
Fixed Overhead Budgeted Variance |
= |
SR*BT-AR*AT (paid) |

3. |
Fixed Overhead Efficiency Variance |
= |
SR*ST-SR*AT (worked) |

4. |
Fixed Overhead Volume Variance |
= |
SR*ST-SR*BT |

5. |
Fixed Overhead Capacity Variance |
= |
SR*AT(worked)-SR*RBT |

6. |
Fixed Overhead Calendar Variance |
= |
SR*RBT-SR*BT |

(Where, RBT=Revised Budgeted Time)

**Sales Value Variance:**

1. |
Sales Value Variance |
= |
AP*AQ-BP*BQ |

2. |
Sales Price Variance |
= |
AP*AQ-BP*AQ |

3. |
Sales Volume Variance |
= |
BP*AQ-BP*BQ |

4. |
Sales Mix Variance |
= |
BP*AQ-BP*RAQ |

5. |
Sales Quantity Variance |
= |
BP*RAQ-BP*BQ |

(Where, BP=Budgeted Price, BQ=Budgeted Quantity, RAQ=Revised Actual Sales Quantity)

**Sales Margin Variance:**

1. |
Sales Margin Variance |
= |
AMPU*AQ-BMPU*BQ |

2. |
Sales Margin Price Variance |
= |
AMPU*AQ-BMPU*AQ |

3. |
Sales Margin Volume Variance |
= |
BMPU*AQ-BMPQ*BQ |

4. |
Sales Margin Mix Variance |
= |
BMPU*AQ-BMPU*RAQ |

5. |
Sales Margin Quantity Variance |
= |
BMPU*RAQ-BMPU*BQ |

Where, Actual Margin per Unit=Actual Sell price-Selling cost per unit.

Budgeted Margin per unit=Budgeted Sell price-selling price per unit.

**Control Ratio:**

1. Efficiency Ratio=(Standard Hour for Actual Output/Actual Hours Worked)*100

2. Activity Ratio=(Standard Hours/Budgeted Hours)*100

3. Calendar Ratio=(Available Working Days/Budgeted Working Days)*100

4. Standard Capacity Usage Ratio=(Budgeted Hour/Max possible hour in the Budgeted period)*100

5. Actual Capacity Usage Ratio=(Actual Hours worked/Max possible hour in the period)*100

6. Actual Usage of Budgeted Capacity Ratio=(Actual working Hour/Budgeted Hour)*100

7. Activity Ratio=Efficiency Ratio*Capacity Ratio

8. Maximum Capacity=No of Workers*Maximum no of days in a period

Or

=No of Workers*Maximum no of Hour

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