Cost Techniques(Absorption and Marginal Costing)

Cost Techniques

The several techniques of cost accounting play a key role in making a managerial decisions. The different types of costing include:

Absorption Costing/ Full Costing/Activity based costing:(Product Cost)

Absorption costing is a costing gadget that is used in valuing inventory. It now not solely includes the fee of materials and labor, but also each variable and fixed manufacturing overhead costs. Absorption costing is also referred to as full costing. 

Components of Absorption Costing:

 Direct material (DM)

 Direct labor (DL)

 Variable manufacturing overhead (VMOH)

 Fixed manufacturing overhead (FMOH)--------Conditions---------

        1: Premises is compulsory

        2: Fixed FOH is compulsory for production

Using the absorption approach of costing, the unit product cost is calculated as follows:

Direct material + Direct labor + Variable overhead + Fixed manufacturing overhead = Produced units

Marginal Costing/ Variable Costing/ Directing Costing:(Period Cost)

Marginal value refers to the extend or minimize in the value of producing one extra unit or serving one more customer. It is also recognized as incremental cost. Marginal cost represents the incremental charges incurred when producing additional devices of a properly or service. It is calculated by means of taking the whole alternate in the fee of producing greater items and dividing that by way of the trade in the range of goods produced. The standard variable charges included in the calculation are labor and materials, plus the estimated will increase in fixed charges (if any), such as administration, overhead, and promoting expenses. The marginal value formulation can be used in monetary modeling to optimize the technology of cash flow.

Components of Marginal Costing:

  Marketing expenses

  Selling expenses

  Distribution expenses

  Admin expenses

  Other expenses

  Fixed FOH -------Condition--------

   1: Don't relates to production

Formula:

Marginal Cost (MC)= Change in Total Cost / Change in Quantity