Question

Briefly explain each of the three costing systems in accounting. 

Discuss the situations in which each system would be best employed by a business. 

Answer 1

Cost accounting is an accounting method that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs, such as depreciation of capital equipment. Cost accounting will first measure and record these costs individually, then compare input results to output or actual results to aid company management in measuring financial performance.

1. 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.

2. 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.

3. Standard Costing:

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

4. 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.