Types of costing or How many costing methods are there?

Types of costing or How many costing methods are there?

 before going deep into types first understand what is costing?

  In very simple word its a process which go through a bunch of technical,financial & analytical process to determine the cost of the products or services.

so as per the given definition & real world situation we know that behind a finished product a hugh amount of money, planning, market research,technical analysis,demand supply graph & lot of things needed.
by this we can say from tip to toe costing is involved with everything.
so lets break it.


No:-1 Decision Making Techniques:-

suppose you are a person want to manufacture x product. now first what you will see 
where to setup your business?
How much transportation cost need to continue your business?
How many machine need to conduct business?
How much it will take to manufacture the product?
How much labour will going to need ?
How much profit will be there? ETC.

  All these things are actually determine by various decision making methods mentioned below:-

a) Marginal Costing

  • Differential bassed costing-CVP Analysis – 
  • Profit Volume Analysis by graphical presentation  – 
  • Contribution by limiting factor Approach
some of the formulas are
(i) C=S-V
C= contribution
S= selling price
V= variable cost
(ii) C=F+P 
F= fixed cost
P= profit

(iii) profit volume ratio=(C/S)*100
(change in C/change in S)*100
(change in profit/change in S)*100

(iv) brake even point (where no profit no loss):-
C= F
source : cfi

(b) Decisions taken for alternative choices by contribution per limiting factor – 
  • Maximum utilization of raw-materials & resources  –
  • Make or Buy –
  • Evaluation of Orders –
  • Multiple scarce resource problems- 
  • Product minimum maximum sales pricing….. etc.

(c) Pricing Decisions and Strategies through out the process –
  •  New Product Pricing after evaluation , 
  • Use of Costs in Pricing, 
  • Sensitivity Analysis ; 
  • Monopoly vs. Competitive Pricing;
  • Bottom Line Pricing.

what is carbon tax ?

(d) Costing of Service Sector
  • methods, 
  • pricing,
  • performance 
  • measurement

(e) Transfer Pricing

The price at which we have to transfer our unfinished product to other product line for further process or selling to 3rd party or our sister concern.
  • Object,
  • Methods of doing 
  1.  Cost Based, 
  2. Market Price Based, 
  3. Negotiated Pricing
  •  Advantages and limitation,
  •  platform for making Transfer Prices,
  •  Transfer Price in various situations, 
  •  cause of Conflicts and resolve the Conflicts;

(f) Relevant Cost Analysis
  • Relevant and Irrelevant Costs with multiple factor - 
  • Sunk cost which is also known as Historical Cost, 
  • Committed Cost (which is also part of relevant cost)
  • Absorption Costing,
  • such kind of Situations where Fixed Costs become important to take into account for decision making and its related implications. as an example :-rent for cold storage
(g) Profitability Analysis – 

Now for all this thing we actually need appropriate tools to determine all these factor. these tools are:-

  • Transportation:- 

optimal distribution of cost by mostly 3 method:-


1. The north-west corner rule
2. Lowest cost entry method
3. Vogel’s approximation method

Simulation is a table bassed modeling system and analysis tool widely used for the purpose of designing,analysing, planning, and control of manufacturing systems. 


Network analysis gives us to calculate a systematic structural approach to the problem of managing a

project up to successful completion. Also, because of graphical representation, it can easily understandable
and it can also be used by those with a less technical background.


Learning Curve Theory is connected with the idea that when a new job, process or activity commences for the
first time it takes more time than future cause it is new process, employees are new to that skill & less production.but when it continue for sometimes then overall time taken became less like the following graph.

when there are more than 1 condition or limiting factor involving manufacturing, service, trading activity etc. then for the optimum distribution to achive highest production,profit etc it is used.

it is also a linear problem which has same no of column & row which enable us determine optimum distribution of cost and other factors with very simple calculation.

So above all are for decision making method & concept:-
now its time to see how to record these cost transaction:-
  • Historical or traditional method :-
This method is known as cost sheet from the very past time. It has some limitation to determine actual cost for multiple products. But many small companies still calculate their cost by this way for single product for manufacturing or service.
  • Inventory management :-
maintaining inventory is a very part of a companies, cause it needs a big place which defiantly increase rent as a fixed cost for the product & if it become damage so nit will be huge loss .

 In other hand poor inventory management leads company to shortage of Raw material in mean time, extra price of Raw material, spoilage of finished goods etc.

For good inventory management system some Technics were developed, these are:-

  1. FIFO :- First in first out
  2. LIFO :- Last in first out
  3. Weighted average :- in & out will be based on weighted average.
  4. Simple average :- in & out will be based on normal average.
  5. Re-order level :- The time when order may be  given
  6. Danger level :-  The time when order should be  given.
  • Activity Based Cost Management

 At present it is the best method to record the transaction.A more accurate cost management system than traditional cost
accounting; ABC identifies opportunities to improve business process effectiveness and efficiency by determining
the “true” cost of a product or service. Activity Based Costing is a method for determining cost estimates in which
the project is subdivided into section, quantifiable activities or a separate work unit. ABC systems gives us the costs of
individual activities which enable us to determine the actual cost of the each product.

 Now after recording its time to analysis the over all work to determine work is done as per Plan or not :-

for that we need some tools or methods whatever the name may you called:-

1.Bench Marking :- matching with competitor

2.Total Quality Management (TQM) : total analysis of quality of work

3.Praise Analysis:- Identification of improvement opportunities and implementation of quality improvement process, of the TQM

Process goes through by six-step activity flow, identified by the acronym ‘PRAISE’.

  • P= Problem Identification
  • R= Ranking
  • A= Analysis
  • I = Innovation
  • S = Solution
  • E= Evaluation

4.Variance Analysis:-

After all this analysis there will be some part which can be developed for the activity.

these are :-
  • Life Cycle Costing 
  • Target Costing 
  • Kaizen Costing 
  • Value Analysis and Value Engineering
  • Throughput Costing 
  • Business Process Re-engineering 
  • Back-flush Accounting  Lean Accounting 
  • Socio Economic Costing
  • Cost Control and Cost Reduction – Basics, Process, Methods and Techniques
  • of Cost Reduction Programme
  • Six Sigma
  • Pareto Analysis
  • Quality Costs
  • 6C’s and 4P’s.

Times of economic US, China, India, Sweden, Denmark, Globe:-

DON'T shop with Combo Offer. See how Government make us FOOL

About Commerce Now

Hi, Myself CMA(semi qualified Cost Accountant) Mousam Roy having more than 5 years experience in commerce field,teaching field as well as professional field with working with PSU and big Firm.


Post a comment