Costing methods according to the cost types included

Costing methods differ also in the cost types that will be included in the value of inventory (costs of goods sold) and which shall be booked directly to the statement of profit and loss as period costs.   Cost accounting methods include: Full costing or full production costing methods, e

Differences between Absorption costing, Activity Based Costing, Marginal costing and Througput costing

The basic difference between these costing approaches is what costs are assigned to the product. However, Absorption costing method and Activity Based Costing use different approach, but more about it can be found  in separate articles.   Under Throughput costing, only direct material co

By product

By-products are secondary products arising from common production together with so called main product. By-product does are not as important as the main products and are usually much cheaper. Example of by-product: lanolin obtained from processing wool or pectin obtained from processing fruits &n

Target costing

Target costing is a costing method used to calculate product costs by deducting desired profit margin from market price of the product / service.  The procedure of setting the costs is thus reversed to cost-plus pricing.  Target costing is used as a means of cost reduction/optimization

External (primary) costs

External (primary) costs arise from outside the company and include for example cost of raw materials and power consumption bought externally or wages and salaries. The opposite of external costs are costs internal (secondary).   More about other possible cost divisions here.

Allocation base (Absorption rate)

Allocation base (or absorption rate) is a monetary or non-monetary parameter, according to which is allocated something that cannot be attributed directly.  It is often used to allocate indirect costs (overheads) to the cost object which is typically a specific product or service. Allocation b

Activity based costing (ABC)

Activity based costing (ABC) is costing method, under which all costs are allocated to company activities according to what are the drivers of the activities. Costs are then allocated to products based on product´s consumption of these activities. ABC was developed to overcome the disadvanta

Joint product

Joint products are different products of similar values and approximately the same importance manufactured together in the same production process. An example can be cogeneration unit that produces both heat and electricity.   As the production or its part is common, joint (common) costs a

Measurement of inventories under IAS 2 Inventories

Under IAS 2 - Inventories, inventories are measured at the lower of cost and net realizable value. (5)   Measurement of costs cost of purchase: covering: purchase price import duties and irrecoverable taxes (e.g. VAT for entities not registered for VAT) transportation, hand

Product´s life cycle

Product´s life cycle stages     Research and development product has not yet been launched to the market and pre-production costs such as research & development or costs of finding appropriate production premises are incurred this stage is included within introduction st

Difference between direct and indirect costs, their division and accounting

According to the traceability to cost object (usually a specific type of product or service) the costs can be divided into DIRECT COSTS (PRIME COSTS) and INDIRECT COSTS (OVERHEADS). The reason for such classification is especially appropriate inventory (and possibly other assets as well) valuation.

Degressive costs

Degressive (under-proportionate) costs are costs that increase more slowly when the production level increase. They are most often related to variable costs which can be linear (proportionate), progressive or degressive. If they are degressive and production increases, unit costs decrease. Cost degr

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