The following techniques of costing are used by the management for controlling costs and making managerial decisions:
- Historical (or Conventional) Costing: It refers to the determination of costs after they have been actually incurred. It means that cost of a product can be calculated only after its production. This system is useful only for determining costs, but not useful for exercising any control over costs. It can serve as guidance for future production only when conditions continue to be the same in future.
- Standard Costing: It refers to the preparation of standard costs and applying them to measure the variations from standard costs and analyzing the variations with a view to maintain maximum efficiency in production. What is done in this case is that costs of each article are determined before-hand under current and anticipated conditions, but sometimes they are determined before-hand under normal or ideal conditions. Then actual costs are compared with the pre-determined costs and deviations known as variances are noted down. Thereafter, the reasons for the variances are ascertained and necessary steps are taken to prevent their recurrence.
- Marginal Costing: It refers to the ascertainment of marginal costs by differentiating between fixed costs and variable costs and the effect on profit of the changes in volume or type of output. In this case, only the variable costs are charged to products or operations while fixed costs are charged to profit and loss account of the period in which they arise.
- Uniform Costing: A technique where standardized principles and methods of cost accounting are employed by a number of different companies and firms is termed as uniform costing. This helps in comparing performance of one firm with that of another.
- Direct Costing: The practice of charging all direct costs to operations, process or products leaving all indirect costs to be written off against profits in the period in which they arise, is termed as direct costing.
- Absorption Costing: The practice of charging all costs both variable and fixed to operation, process or products or process is termed as absorption costing.
- Activity Based Costing: In a business organization, Activity-Based Costing (ABC) is a method of assigning the organization’s resource costs through activities to the products and services provided to its customers. It is defined as a technique of cost attribution to cost units on the basis of benefits received from indirect activities, e.g. ordering, setting up, and assuring quality. ABC involves identification of costs with each cost driving activity and making it as the basis of apportionment of costs over different products or jobs on the basis of the number of activities required for their completion. It is basically used for apportionment of overheads costs in an organisation having products that differ in volume and complexity of production. Under this technique, the overhead costs of the organisation are identified with each activity which is acting as a cost driver i.e. the cause for incurrence of overhead cost. Such cost drivers may be purchase orders issued, quality inspections, maintenance requests, material receipts, inventory movements, power consumed, machine time, etc. Having identified the overhead costs with each cost centre, cost per unit of cost driver can be ascertained. The overhead costs can be assigned to jobs on the basis of number of activities required for their completion
