COSTING METHODS

Treatment of fixed and semi variable Overheads

COSTING PROCESS INCLUDES

CALCULATION OF VARIABLE AND NON VARIABLE COSTS OF LABOUR AND MATERIAL

Factory Overheads NECESSARY TO OPERATE THE FIRM

GENERAL OPERATING EXPENSES

METHODS OF COSTING
Marginal COSTING

Absorption COSTING
ACTIVITY BASED COSTING (ABC COSTING)

Absorption Costing
Principle All costs including an appropriate share of all O/H are borne by all products. Some costs are easily traced to a garment others are not.

Problems Overheads have to be added in some way and then divided amongst all the products Fty O/H in some cases are accounted over long periods of time.Have to be estimated in advance???? OH rate per production hr =Total OH/Estimated Production Hrs.

Marginal Vs Absorption

Absorption Costing

Considers all mfging costs ( variable & non variable) Sometimes O/H is allocated with application rate which is a % of direct labor cost (maybe DM/DE or Prime cost). WHY?????
O/H application rate-Factory overhead/Total direct labor cost

RISKS DLC calculation might not be accurate O/H application rate might not be accurate As DLC reduces it shows reduction in O/H
UNDER Absorption & OVER Absorption

MARGINAL COSTING

VARIABLE COSTS ARE TAKEN AS PRODUCT COST NON VARIABLE COSTS ARE TREATED AS TIME PERIOD COSTS

FEATURES
COST OF PRODUCTION AND CONTRIBUTION TOWARDS GOE CAN BE COMPARED FOR DIFFERENT PRODUCTS INDIVIDUAL STYLES AND THEIR LEVEL OF CONTRIBUTION CAN BE IDENTIFIED

Direct Costing
Considers only variable costs-production labor,materials,sales commissions. Non variable costs,both manufacturing and non manufacturing are treated as time period costs. Individual product costs are clearly identified. Makes it possible to compare the cost of production,contribution each product makes to non variable selling & administrative costs & profit.

Direct Costing
No consideration given to absorbing fixed O/H Variable O/H is usually treated as a part of direct cost. It is Pure Cost This method weakens the impact of managerial responsibility. Most important impact-Proper allocation of semi variable expenses Direct cost advocates feel, fixed O/H should be tracked but not charged to product costs.

METHODS OF COSTING
ABC COSTING OVERHEADS ARE ASSESSED TO ACTIVITY CENTERS COST ARE THAN ALLOCATED TO THE STYLES THAT CREAT THE DEMAND FOR THESE RESORSES

FEATURES IT BUILDS ACCURATE DIRECT LABOUR AND MATERAILS COST DATA BY DETERMINING THE DEMANDS MADE BY PARTICULAR STYLE MAKES EACH ACTIVITY CENTER ACCOUNTABLE FOR TIME AND PRODUCTIVITY COST CAN BE CONTROLLED AS IT MAKES OVERHEAD TRACEABLE COMPANYCANDETERMINE THE PRODUCTS THAT CONTRIBUTE HIGHER GROSS MARGINS

Activity Based Costing(ABC)

A more realistic approach. Build accurate direct labor & materials cost data. All fty O/H,S&D costs.Admin costs are assessed to activity centres and then allocated to styles which demanded these resources. It is a diagnostic tool that allows focus on overhead cost reduction as well as reductions in direct labor cost.

Activity Based Costing(ABC)

Companies can determine the products & customers that contribute higher gross margins and those that do not. Provides realistic information about support activities and product costs. Makes all costs traceable Makes each activity center accountable for time & productivity

Example
Sales = P1 = $ 1000: $1000 DM = p1 = $300: p2 = $500 DL = p1 = $400: p2 = $200 Variable O/H = p1 = $200: p2 = $100 Variable S&D Expenses = p1 = 50: p2 = $30 Non V. O/H = p1 = $100: p2 = $50 Non S&D Expenses = p1 = 50: p2 = $20

Calculate gross profit, Contribution and net profit for each product