Documente Academic
Documente Profesional
Documente Cultură
WINNEBA
SCHOOL OF BUSINESS
DEPARTMENT OF ACCOUNTING
LECTURE SLIDES ON COSTING TECHNIQUES
I.A. AHMED
Introduction
• Costing techniques are used by cost accountants to determine the cost of production.
• They are the techniques accountants use in treating manufacturing costs of products.
• Costing techniques are not an alternative to costing methods since they are applied to
costing methods such as job, process etc. to determine product cost.
• For instance, job costing as a costing method could apply either marginal or
absorption costing as a technique to cost a job.
• Costing techniques basically answer the question-
should production cost (both variable and fixed) form part of product cost or some
cost should be exclude?
• If some costs are excluded, there should be reasons provided for such a decision.
TYPES OF COSTING TECHNIQUES
• These overheads are charged entirely against revenue for the period.
• Consequently, the inventory cost of a unit of a product under this
technique contains no fixed production cost.
• The proponents of marginal costing as a technique argue that, fixed
overheads are time related.
• Thus items such as rent and rates, property taxes- which are time
related should not form part of product cost.
FORMAT FOR DETERMINING PRODUCT COST UNDER
THE TWO TECHNIQUES
1. Costs are separated into the fixed and variable elements and semi-
variable costs are also differentiated like wise.
2. Only the variable costs are taken into account for computing the
value of stocks of work-in-progress and finished products.
3. Fixed costs are charged off to revenue wholly during the period in
which they are incurred and are not taken into account for valuing
product cost/inventories.
FEATURES OF MARGINAL COSTING
• Since there are differences in the computation of product cost under the
two methods, stock valuation will also result in different result even though
stock quantities might be the same.
• The difference is as a result of the inclusion of fixed production cost and the
exclusion of same under different techniques when computing product cost.
• Costing provides stock valuation for income determination.
• The value of stock or inventory therefore has a significant impact on income
levels.
• It follows therefore that, income figures will differ between the two
approaches to product costing any time that there are unsold stocks.
The scenarios are explained below:
1. When production equals sales then absorption costing income equals marginal
costing income. This is because, both methods charge equal fixed costs to the
period.
2. When production exceeds sales. That is, there is unsold stock. In this case,
absorption costing income will be higher or exceed marginal costing income.
This is because, absorption charges less fixed costs to the period than marginal
costing. Part of the fixed cost is therefore deferred to the next period.
3. When sales exceeds production there will be an opening stock. In this case,
marginal costing income will be higher than absorption costing income. The
reason being that, more fixed cost is charged to the period in absorption than
marginal costing. The fixed cost is made up of those incurred under the current
period and those brought forward from the previous period.
RECONCILIATION OF NET OPERATING PROFIT UNDER
THE TWO TECHNIQUES