Costing

Costing is the process of determining the total cost of producing goods or providing services. It involves identifying and measuring the resources consumed, including materials, labor, and overhead, and assigning those costs to products, services, or cost objects. The goal is to support planning, pricing, budgeting, and decision making by providing accurate cost information.

Costs are often classified as fixed or variable, and as direct (traceable to a cost object) or indirect (overhead). Additional classifications include product costs (inventoriable) and period costs (expensed in the period). Costing methods differ in how they assign overhead and how they treat fixed costs. Absorption costing allocates fixed and variable overhead to products, while marginal or variable costing assigns only variable production costs to the cost objects.

Activity-based costing allocates overhead using cost drivers based on activities. Other approaches include standard costing, which uses pre-established costs for comparison, target costing, which starts from the desired selling price, and life-cycle costing, which considers costs across the entire life of a product. Different methods reflect different managerial priorities and data requirements.

Cost information is produced by cost accounting systems within management accounting and is used for pricing decisions, product mix optimization, budgeting, performance measurement, and cost control. Limitations include estimation error, reliance on allocations and assumptions, and the fact that different methods produce different cost figures.

In practice, organizations select costing methods that fit their industry, data availability, and decision needs, often combining several approaches to improve accuracy and relevance.