For example, the cost of labour engaged in a service department can be charged wholly and directly but the canteen expenses of the factory cannot be charged directly and wholly. Its proportionate share will have to be found out. Charging of costs in the former case will be termed as "allocation of costs" whereas in the latter, it will be termed as "apportionment of costs."
Management Accounting is an indispensable tool for any business unit to set budgets. It sets standard costs and actual costs of processes, departments or products and through variance analysis measure the profitability and social use of funds. This assists the management to attract more investors and tap potential funding sources.
The main aim of costing is the providing crucial management information to ascertain costs, proper allocation of costs to a centre of responsibility, cost planning and control. Further, it provides the necessary information to plan the cost of operation and ability to monitor and control those cost against the plan.
Costing can provide all the information required for the effective management decisions. The effective costing is therefore essential for survival of any business.
3.2 Methods of costing
Costing can be defined as the procedure and technique of ascertaining costs. The principles in every method of costing are same but the methods of analyzing and presenting the costs differ with the nature of business. The methods of costing are as follows:
Activity Based Costing
3.2.1 Absorption Costing
Absorption costing means that all of the manufacturing costs are absorbed by the units produced. In other words, the cost of a finished unit in inventory will include direct materials, direct labour, and both variable and fixed manufacturing overhead. As a result, absorption costing is also termed as full costing or the full absorption method.
3.2.2 Marginal costing
Marginal cost means the cost of the marginal or last unit produced. It is also defined as the cost of one more or one less unit produced besides existing level of production.
Marginal costing may be defined as the technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision-making.
Marginal costing technique has given birth to a very useful concept of contribution