Question

5.
Write short notes on the following:
a) Methods of absorption
b) Contract costing
c) Process costing
d) Classification of costs​

Answer 1

a) Methods of absorption:-

Absorption costing, sometimes called full absorption costing, is a managerial accounting method for capturing all costs associated with manufacturing a particular product. The direct and indirect costs, such as direct materials, direct labor, rent, and insurance, are accounted for using this method.

b) Contract costing:-

Contract costing is the tracking of costs associated with a specific contract with a customer. For example, a company bids for a large construction project with a prospective customer, and the two parties agree in a contract for a certain type of reimbursement to the company.

c) Process costing:-

CIMA defines process costing as, “The costing method applicable where goods or services result from a sequence of continuous or repetitive operations or processes. Costs are averaged over the units produced during the period.”

d) Classification of costs:-

Direct or Indirect Cost, Discretionary Cost, Controllable Cost, Product Cost, Normal Cost, Fixed Cost and Predetermined Cost.

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Answer 2

(a) Methods of absorption:-

Under this method, cost of direct materials is used instead of cost of direct labour as we have seen in above paragraph. Thus, the cost of direct material is used as a basis of charging overhead to units. So, it is calculated by dividing the total factory overhead cost by the total cost of direct materials used.

(b) CONTRACT COSTING:-

Ans= Contract costing is the tracking of costs associated with a specific contract with a customer. For example, a company bids for a large construction project with a prospective customer, and the two parties agree in a contract for a certain type of reimbursement to the company.