Question

Select and discuss various techniques and processes which can be used in traditional cost modelling.

Answer 1

Select and discuss various techniques and processes which can be used in traditional cost modelling.
Fixed costs are those costs that do not vary with respect to changes in output and would accrue even if no output was produced. E.g. Rent, interest payments, property taxes and employee salaries. However, fixed costs are restricted to specific time frame, since over the long run fixed costs can vary. For example, a manufacturer may decide to expand capacity in tandem to the increase in demand for its product, requiring a higher level of expenditure on plant and equipment.

Variable Cost:

Variable cost changes proportionately to the level of output. For manufacturers, the key variable cost is the cost of materials.

Total Cost:

It is defined as the sum of fixed, variable and semi variable costs.

Direct and Indirect cost:

Direct costs typically include the major components for manufacturing goods and the labor directly required to produce those goods. Direct costs are also referred to as prime costs. On the other hand, indirect costs include plant-wide costs such as those resulting from the use of energy and fixed capital. Indirect costs are also referred to as overhead.

Incremental cost:

It is mainly the extra cost associated with manufacturing one additional unit of production. It is also referred to as differential cost.

Opportunity Cost:

It is defined as the cost of an alternative that is forgone (benefit, profit, value given up) in order to pursue a certain action.

Sunk Cost:

It is the cost that is already incurred and cannot be recovered.

TYPES OF COSTING:

Marginal Costing:

Through this method only the variable cost is allocated i.e. direct materials, direct expenses, direct labour and variable overheads to production. It does not include the fixed cost of production.

Absorption Costing:

It is the technique to absorb the fixed and variable costs to production. In this method, full costs i.e. fixed and variable costs are absorbed to the production.

Standard Costing:

When the costs are predetermined on certain standards in a given set of operating conditions, it is called standard costing.

Historical Costing:

In this method the costs are determined in terms of actual costs and not predetermined standard costs. Costs are determined only after it is incurred. Almost all organizations adopt this method of costing.

Answer 2

Product costing methods are used to assign a cost to a manufactured product. The main costing methods available are process costing, job costing, direct costing, and throughput costing. Each of these methods applies to different production and decision environments.