SLC | S21W3 | Costs for entrepreneurs - Costing methods.

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If I talk about costing methods then these are basically some of the strategies and techniques that are useful for the determination of cost for the production of goods or services as well as these are some of the methodologies which are helpful in businesses calculation as well as total production costs, identification of areas for reducing cost and setting prices for their products.

Types of Costing Methods:

• First of all absorption costing is defined as assigning of fixed and variable costs to products depending on absorption of costs which are overhead.
• There are variable costing which considers variable cost and exclude cost which are fixed.
• Direct costing is another method of assigning just direct costs to products and direct coast examples can be labour or materials.
• Standard costing is a methodology which utilize pre determined standards of cost for materials ,labor and overhead.
• One costing method is activity based costing which is assigning cost depending on activities which are performing.
• If I talk about marginal costing method then it has most of his focus at additional cost for producing one more unit.
• Target costing is a method for setting costs depending on market conditions and expectations of customers.
• Last but not least life cycle costing method is useful for considering cost throughout life cycle of product.

Importance of Costing Methods:

Below I am going to talk about importance of costing method in a comprehensive way;

• These methods are helpful for the determination of prices which ensure probability and strong decision making process.
• These are helpful for identification of areas for reducing and optimisation of cost.
• These methods are useful for providing information for making informed decision related to production ,investment and pricing.
• these methodology are helpful in the evaluation of business performance and for identification of areas which needs to be improved.
• These are helpful for informing decisions related to development of product,marketing as well as investment.
• These methods are useful for making business competitive if costing is precise.
• These methodologies are helpful for giving surety of compliance with standards of accounting and regulatory needs.
• These are helpful for making precise financial reports if costing is making precise.

Now I am going to make a comparison in between Job Order Costing and Process Costing below;

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I research two costing methods different from those which were explain in class and now I am going to explain them below in a comprehensive way;

1. Absorption Costing Method

This is the costing method which assigns fix and variable costs both to products.

Key Characteristics:

• This methodology includes direct materials,labors and overhead costs.
• This methodology utilize pre determined overhead rate.
• This methodology is suitable for those manufacturers which have high overhead cost.

Steps to Implement Absorption Costing:

• Determination of fixed and variable cost is a first step for implementation of this type of costing method.
• Calculation of overhead rate is another important and crucial step to take.
• Assigning of cost to product is another important step and last but not least calculation of unit cost is a crucial one step.

Advantages:

• This is very simple in its implementation
• It has complaints with generally accepted accounting principles as well as it gives encouragement for efficient utilisation of resources.

2. Standard Costing Method

This is a methodology which is assigning pre determined cost to product depending on material which is expected, labor as well as overhead cost.

Key Characteristics:

• Utilisation of pre determined standard costs.
• It also make a comparison of actual cost with standard cost.
• It is also suitable for production of mass and repetitive processing.
• It is used for encouraging of control of cost and its efficiency.

Steps to Implement Standard Costing:

• Determination of standard costs
• Setting up of variance accounts
• Recording of actual costs
• Analyzation of variances

Advantages:

• Encouragement for control of costs.
• Simplification of cost tracking
• Enhancement of budgeting and forecasting
• Identification of areas which needs any improvement.

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This is I am going to explain an example of costing by work orders for cake manufacturing business:

So suppose that;

Work Order #100: Wedding Cake

Direct Materials:

Direct Labor:

Overhead Costs:

Total Cost:

Direct materials total cost is around $93.50
Direct labor is around $130
Overhead costs are around $100
Total Cost is around $323.50

Unit Cost:

As this is a customized wedding cake then I will calculate unit cost as total cost which is divided by one unit (whole cake).

Unit Cost = Total Cost / 1 unit = $323.50 / 1 = $323.50

Selling Price:

If you want to determine selling price you will add a markup to unit cost.

Selling Price = Unit Cost + Markup

= $323.50 + (40% x $323.50)
= $323.50 + $129.40
= $452.90

This is lowest price which business must charge for a wedding cake to making sure profitability.

By utilizing this work order costing method, business may precisely tracking costs and setting prices for each customized order of cake.

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