Use of Costing Methods

Use of Costing Methods

Absorption Costing

Absorption costing recognises all costs associated with production, both variable and fixed, into unit cost.
Useful for management when attempting to cover all costs of the company.
Provides a comprehensive view of production costs, which is helpful for external reporting and price setting strategies.

Marginal Costing

Marginal costing only factors in variable costs related to production into unit cost.
Extremely useful for short-term decision making and cost control, as it can highlight the impact of changes in volume on profitability.
Complements management strategies focusing on operational efficiency.

Activity Based Costing (ABC)

Activity Based Costing (ABC) divides overhead costs based on the different activities involved in production.
It provides a more accurate product cost by accounting for all activities involved in production.
This method helps identify areas of inefficiency and waste, enabling cost-saving decisions.

Standard Costing

Standard costing involves setting predetermined costs, thus easing budget creation and enhancing cost control.
It highlights deviations between actual and standard costs, paving the way for performance analysis and efficiency improvement.
Useful for manufacturing industries where production processes are standardised and predictable.

Job Costing

Job costing tracks costs to individual jobs or tasks, suitable for customised goods or services.
Provides detailed cost information for each job and supports pricing decisions, particularly for contract-based work.
Allows for the monitoring of profitability on a job-by-job basis, allowing for better job selection and negotiation.

Process Costing

Process costing averages costs over large quantities of identical products.
Useful in mass production industries, like manufacturing, where it’s impractical to track individual unit costs.
Helps in establishing a routine cost per unit, aiding in setting prices and carrying out profitability analysis.