PRODUCT COSTING METHOD
The major methods that can be used in product costing by manufacturing company are Absorption costing and Variable costing.
Variable costing is also known as a Marginal costing, a technique/tool of costing which includes only variable manufacturing costs , in the form of direct materials, direct labor and variable manufacturing overheads while determining the cost per unit of a product.
In the costing of product/service, a variable costing technique considers the behavioral characteristics of costs that is segregations of costs into fixed and variable elements, because per unit variable cost is fixed and total costs are variable in nature, where as total fixed costs are fixed and per unit fixed cost is variable in nature and furthermore variable costs are controllable in nature, while total fixed costs are un-controllable in nature. Variable costing is useful for short-term planning, control and decision-making, particularly in a business where multi-products are produced. In variable costing technique, the contribution is calculated after deducting variable costs from sales value with reference to each product or service, in order to calculate the total contribution from all products/services which are made towards the total fixed costs incurred by the business. As the fixed costs are treated as period costs, are deducted from total contribution to arrive at net profit.
Absorption costing is a costing technique that includes all manufacturing costs, in the form of direct materials, direct labor, and both variable and fixed manufacturing overheads, while determining the cost per unit of a product. It is also termed as the full- cost technique.
Absorption costing considers a share of all costs incurred by a business to each of its products/services. In absorption costing technique; costs are classified according to their functions. The gross profit is calculated after deducting production costs from sales and from gross profit, costs incurred in relation to other business functions are deducted to arrive at the net profit.