PRODUCT COSTING METHOD
The major methods that can be used in product
costing by manufacturing company are Absorption costing and Variable costing.
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:
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.
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