The types and techniques of costing are as follows:
- Historical Costing:
‘The ascertainment of costs after they have been incurred’ Historical costs are, therefore, ‘postmortem’ costs as under this method all the expenses incurred on the production are first incurred and them the costs are ascertained.
- Standard Costing:
‘The preparation and use of standard costs, their comparison with actual costs and the analysis of variance to their causes and points of incidence’.
Here the standards are first set and then they are compared with actual performances. The difference between the standard and the actual is known as the variance. The variances are analyzed to find out their causes and also the points or locations at which they occur.
- Marginal Costing:
‘The ascertainment of marginal costs and of the effects on profit of changes in volumes or type of output by differentiating between fixed costs and variable costs’.
The fixed costs are those which do not change but remain the same, with the increase or decrease in the quantum of production. The variables costs are those which do change proportionately with the change in quantum of production.
The marginal costing takes into account only the variable costs to find out ‘marginal costs’. The difference between Sales and Marginal costs is known as ‘Contribution’ and contribution is an aggregate of Fixed costs and Profit/Loss. So the fixed costs are deducted from the contribution to find out the profits. Marginal costing is a technique to ascertain the effect on profits. Marginal costing is a technique to ascertain the effect on profit by the change in the volume of output or by the change in the type of output.
- Direct Costing:
The practice of charging all direct cost to operations, process or products, leaving all the indirect costs to be written off against profits in the period in which they arise
- Absorption Costing
‘The practice of charging all costs, both variables and fixed, to operations, processes or products.
This is the traditional technique as opposed to Marginal or Direct costing techniques. Here both the fixed and variables cost are charged in the same manner.
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