Decision Making and Costing

DECISION MAKING AND COSTING

Variable costing is a cost accounting technique /model whereby only variable costs are included in the cost of a product /service . Variable costs are those that change /vary with the volume of activity /production These are

Direct materials

Direct Labour

Variable manufacturing overheads

Fixed costs are excluded from the cost of the product /service

Activity Based Costing is a cost accounting system approach that has come to replace the traditional costing methods . Historically indirect costs were allocated to products /services based only on volume . Single

br volume models like direct labour costs and /or labour hours were used in allocating indirect costs to products /services

But Activity Based Costing approach focuses on activity centers in the organization . The cost of a product /service is then ascertained based on the time consumed /used or the number of transactions that it runs through that activity . In essence it is more reliable and more accurate Both costing methods are useful in managerial decision-making . They both do not recognize fixed costs since these are irrelevant in decision making . Fixed costs are unavoidable and however much accurate one is the costs cannot be avoided

Activity Based Costing does not act to replace the traditional approach but to supplement it .Variable costing , also commonly referred to as marginal costing and Activity Based Costing can be applied /used in increasing shareholder 's value . This is because both models involve the study of the behavior of costs thus making it easier for management to control the same . The end result is that profitability is enhanced because costs are factors of profits

In both processes , the ability to accurately and reliably measure the costs of products / services is inevitable . In variable costing , it is important that only costs directly attributable to the production process or the execution of the service are included as part of the variable cost . Profit is then derived by netting both the variable cost and period costs from the turnover for the year

REFERENCES

George Foster , Horngren Charles Cost Accounting : A Managerial Emphasis Prentice Hall ,2007

James A Activity Accounting : An Activity Based Costing Approach John Wiley Sons , 2004

Ronald Hilton , Frank Selto Cost Management : Strategies for Business Decisions Mc Graw Hill ,2005...