The following points highlight the top six types of costing systems. The types are: 1. Historical Costing 2. Absorption Costing 3. Direct Costing 4. Marginal Costing 5. Standard Costing 6. Uniform Costing.
Type # 1. Historical Costing:
In this type of costing system, the costs are ascertained only after they have been incurred. The main objective of it is to ascertain costs that have been incurred in past. It is the process of accumulation of costs after they are incurred in a systematic manner. The historical costs are used only for postmortem examination of actual costs incurred and it would be too late to control. The actual figures can be compared only when the standards of performance exists.
Type # 2. Absorption Costing:
Under the ‘absorption costing system’ all fixed and variable costs are allotted to cost units and total overheads are absorbed according to activity level. In absorption costing system, fixed manufacturing overheads are allocated to products, and these are included in stock valuation.
Therefore, valuation of inventories of finished goods and WIP includes manufacturing fixed cost and transferred to next period. Unlike manufacturing fixed overhead, the administrative overhead, selling and distribution overheads are treated as fixed cost and recorded only when they incurs. It is a traditional form of cost ascertainment. It is based on the principle that costs should be charged or absorbed to whatever is being costed – be it cost unit, cost centre – on the basis of the benefit received from these costs.
Type # 3. Direct Costing:
It is a method of costing in which the product is charged with only those costs which vary with volume. Variable or direct costs such as direct material, direct labour and variable manufacturing expenses are examples of costs charged to the product. All indirect costs are charged to profit and loss account of the period in which they arise. Indirect costs are disregarded in inventory valuation.
Type # 4. Marginal Costing:
Under marginal costing, costs are classified into fixed and variable costs. Variable costs are charged to unit cost and the fixed costs attributable to the relevant period are written-off in full against the contribution for that period.
Contribution margin indicates the recovery of fixed cost before contributing towards the operational profit. This technique is widely used for internal management purpose for decision making rather than for external reporting.
Type # 5. Standard Costing:
Under standard costing system, the ascertainment and use of standard costs and the measurement and analysis of variances is done for control purpose. Standard cost is a predetermined cost which is computed in advance of production on the basis of a specification of all the factors affecting costs and used in Standard Costing. Its main purpose is to provide a base for control through Variance Accounting, for valuation of stock and work-in-progress and, in some cases, for fixing selling prices.
Type # 6. Uniform Costing:
It is not a distinct method of costing. It is the adoption of identical costing principles and procedures by several units of the same industry or several undertakings by mutual agreement. It facilitate valid comparisons between organizations and helps in elimination of inefficiencies.