The Types of Costing in Cost Accounting

Cost accounting is an accounting process that measures all of the costs associated with production, including both fixed and variable costs. The purpose of cost accounting is to assist management in decision-making processes that optimize operations based on efficient cost management. The costs included in cost accounting are as follows:

Financial Accounting – Lesson 7.2 – Overview of the Different Types of Costing Methods

Categories of business expenses

There are a few different categories of expenses that cost accounting looks at. These expenses include:

What is costing?

Costing, or cost accounting, is a system for determining a companys cost of production. This type of accounting looks at both variable and fixed costs incurred throughout the production process. Companies use costing information to make informed business decisions and ensure each area of production is financially effective and efficient.

An organizations internal management performs costing activities, and, unlike other forms of accounting, isnt seen by outside clients or institutions. As a result, there are no set standards that cost accounting must meet, and it has more flexibility in comparison to other types of accounting.

Types of costing

The following are the most common types of cost accounting used by an organizations internal finance or management team:

1. Absorption costing

Absorption costing, sometimes referred to as full costing, is used by a company to determine all costs that go into the manufacturing of a specific product. This costing method involves allotting all variable and fixed costs to cost units and the total overhead of the company is absorbed based on the organizations activity level. In this type of costing, manufacturing overheads are apportioned to specific products and included in the companys stock valuation regardless of whether the product was sold in the period being assessed.

Common types of costs included in absorption costing are:

Companies that use absorption costing will have a balance sheet with a higher ending inventory. However, the expenses on their income statement will be lower.

2. Historical costing

Historical costing is a method of accounting that measures the value of an asset based on its original cost when purchased or acquired by the organization. Many companies use historical costing to record the cost of long-term assets on their balance sheets. Assets that are recorded as historical costs are done so even if they have significantly appreciated in value since the acquisition of the asset. However, asset depreciation is taken into account when using the historical costing method, and total accumulated depreciation is subtracted from the historical cost on a balance sheet.

This type of costing is commonly used for fixed assets and is considered a generally accepted accounting principle (GAAP) in the United States.

3. Marginal costing

Marginal costing is a type of cost accounting used to assess the impact of variable costs on the total volume of output or production. This costing approach adds an additional unit to production to allow management to determine the impact of different levels of volume and costs on the companys overall operating profit. Marginal costing is frequently used to make short-term financial decisions and to assess the profitability potential of new products, marketing campaigns and current sales prices of existing products.

4. Standard costing

Standard costing is a costing approach that denotes standard costs for inventory and the cost of goods sold (COGS.) The costs associated with standard costing are based on the production of a good under typical operating conditions. Companies can then assess whether the standard cost and actual cost are comparable or if there are any discrepancies. Determining the difference between standard and actual costs is known as variance analysis.

If a company performs a variable analysis and finds that the actual costs are more than what was anticipated, the variance is considered unfavorable. If the company finds that the actual costs match or are lower than the standard costs, the variance is considered favorable. Two variables affect whether a variance will be favorable or unfavorable. These variables include the cost of the input, or rate variance, and the quantity or efficiency of the input, or volume variance.

5. Lean costing

Lean costing, or lean accounting, helps to better the financial management practices used by an organization. Lean costing assigns value-based pricing to the costs of production rather than using standard or historical costing methods. This gives the company an idea of where waste can be minimized to optimize productivity in the production process based on lean performance measurements.

6. Activity-based costing

Activity-based costing, often referred to as ABC, is when a company assigns overhead costs to specific goods or services. This type of cost accounting relies on a companys activities, such as a unit of work or product design. These activities are known as cost drivers as they typically cost the most in the production process.

Using the ABC accounting method, a company performs an activity assessment to determine the cost drivers rather than simply assigning costs based on a generic measurement. For this reason, activity-based costing typically provides a more accurate idea of the total cost of production as well as the profitability of the company realized by that production.

FAQ

What are the 4 types of costing?

Direct, indirect, fixed, and variable are the 4 main kinds of cost. In addition to this, you might also want to look into operating costs, opportunity costs, sunk costs, and controllable costs.

What are different types of costing?

Types of costing
  • Absorption costing. Absorption costing, sometimes referred to as full costing, is used by a company to determine all costs that go into the manufacturing of a specific product. …
  • Historical costing. …
  • Marginal costing. …
  • Standard costing. …
  • Lean costing. …
  • Activity-based costing.

What are the 3 types of costing?

The types are: 1. Fixed Costs 2. Variable Costs 3. Semi-Variable Costs.

What are the 6 types of cost?

A supply professional knows that Price = Cost + Profit. He or she also must understand variable, fixed, semi-variable, total, direct, and indirect costs and how those costs influence prices.

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