Costing methodologies to enhance profitability

Job order costing where costs are assigned to specific jobs or batches. This is suitable for custom orders or products that are distinctly different from each other and is mostly used in construction, custom manufacturing, shipbuilding or special-order printing.

Process costing accumulates costs over a period and then assigns it to all units produced during that period. This method is used for homogeneous products, especially in the chemical, oil refining, food production and textiles industries.

Activity-based costing (ABC) is where costs are assigned to activities based on their use of resources, and then costs are assigned to products based on their use of these activities. This method provides a more accurate cost per product by considering indirect costs and is mostly used in manufacturing and service industries with high overhead costs.

Standard costing pre-determines costs and standards are established for materials, labour and overhead. Actual costs are compared to these standards to determine variances. This methodology is mostly used in mass production environments.

Variable costing assigns only variable costs (direct materials, direct labour, variable manufacturing overhead) to product costs. Fixed manufacturing overhead is treated as a period expense. Companies analysing the impact of fixed versus variable costs on profitability will employ this methodology.

Absorption costing, or alternatively called full costing, will assign both variable and fixed manufacturing costs to products. This method is required by GAAP (Generally Accepted Accounting Principles) for external reporting.

Throughput costing or super variable costing will only assign direct material costs to products. All other costs are treated as period expenses. This method focuses on maximising throughput (sales minus direct material costs) and encompasses bottleneck management and process improvements. Throughput costing is often used when companies are focused on bottleneck management and process improvements.

Marginal costing is like variable costing but focuses on the impact of producing one additional unit. This method helps in decision-making regarding pricing, outsourcing and production levels.

Actual costing uses the real costs of direct materials, direct labour and manufacturing overhead to calculate the cost of goods sold (COGS) and ending inventory. Actual costing is particularly useful for businesses that require precise cost tracking and where the actual costs can vary significantly.