Under marginal costing, costs are classified into fixed and variable costs. Indirect costs are disregarded in inventory valuation. All indirect costs are charged to profit and loss account of the period in which they arise. Variable or direct costs such as direct material, direct labour and variable manufacturing expenses are examples of costs charged to the product. It is a method of costing in which the product is charged with only those costs which vary with volume. It is based on the principle that costs should be charged or absorbed to whatever is being costed – be it cost unit, cost centre – on the basis of the benefit received from these costs. It is a traditional form of cost ascertainment. Unlike manufacturing fixed overhead, the administrative overhead, selling and distribution overheads are treated as fixed cost and recorded only when they incurs. Therefore, valuation of inventories of finished goods and WIP includes manufacturing fixed cost and transferred to next period. In absorption costing system, fixed manufacturing overheads are allocated to products, and these are included in stock valuation. Under the ‘absorption costing system’ all fixed and variable costs are allotted to cost units and total overheads are absorbed according to activity level. The actual figures can be compared only when the standards of performance exists. The historical costs are used only for postmortem examination of actual costs incurred and it would be too late to control.
It is the process of accumulation of costs after they are incurred in a systematic manner.
The main objective of it is to ascertain costs that have been incurred in past. In this type of costing system, the costs are ascertained only after they have been incurred.
The following points highlight the top six types of costing systems.