BM

LAW COLLEGE

PROJECT REPORT

ON

COSTING TECHNIQUES IN MANUFACTURING INDUSTRY

In Partial Fulfillment of Requirement for The Degree of

BACHELOR OF BUSINESS ADMINISTRATION

IN

BBA. LLB.

2nd Semester

2019-20

Submitted by: Submitted to:

Aditi Vyas Dr. Kiran Balani

INDEX
1. ACKNOWLEDGEMENT
2. CERTIFICATE
3. TYPES OR TECHNIQUES OF COSTING
4. COSTING TECHNIQUES IN MANUFACTURING INDUSTRY
5. ADVANTAGES AND DRAWBACKS
6. BIBLIOGRAPHY

ACKNOWLEDGEMENT
In the accomplishment of this project successfully, many people have bestowed
upon me their blessings and the heart pledged support, this time I am utilizing to
thank all people who are concerned with this project.

Primarily I would thank god for being able to complete this project with
success. Then I would like to thank my teacher Dr. Kiran Balani, whose
valuable guidance has helped me patch this project and make it a full proof
success. Their suggestions and instructions have served as the major contributor
towards the success of this project.

Then I would like to thank my parents and friends whose valuable suggestions
and guidance has been very helpful in various phases of the project.

Last but not the least I would thank my classmates who have helped me a lot

-Aditi Vyas

CERTIFICATE
 This is to certify that Ms Aditi Vyas has completed her project work for
the degree of "BACHELOR OF BUSINESS ADMINISTRATION LLB"
on title of project work to be written "COSTING TECHNIQUES IN
MANUFACTURING INDUSTRY" under my supervision. It is her own
work and facts reported by her personal feelings and investigation.

- Dr. Kiran Balani

TYPES OR TECHNIQUES OF COSTING:

Following are the main types or techniques of costing for ascertaining
costs:

1. Uniform Costing:
It is the use of same costing principles and/or practices by several undertakings
for common control or comparison of costs.

2. Marginal Costing:
It is the ascertainment of marginal cost by differentiating between fixed and
variable cost. It is used to ascertain the effect of changes in volume or type of
output on profit.

3. Standard Costing:
A comparison is made of the actual cost with a pre-arranged standard cost and
the cost of any deviation (called variances) is analysed by causes. This permits
management to investigate the reasons for these variances and to take suitable
corrective action.

4. Historical Costing:
It is ascertainment of costs after they have been incurred. It aims at ascertaining
costs actually incurred on work done in the past. It has a limited utility, though
comparisons of costs over different periods may yield good results.

5. Direct Costing:
It is the practice of charging all direct costs, variable and some fixed costs
relating to operations, processes or products leaving all other costs to be written
off against profits in which they arise.

6. Absorption Costing:
It is the practice of charging all costs, both variable and fixed to operations,
processes or products. This differs from marginal costing where fixed costs are
excluded.

Any of the methods of costing like unit or output costing, service costing,
process costing etc. can be used under any techniques of costing.
COSTING TECHNIQUES IN
MANUFACTURING INDUSTRY
For a manufacturing industry the challenge is always to determine the right
product mix and to price products in the right way to achieve the desired profit
margin. It is crucial for organizations to keep track of the levels of inventory,
production costs and profitability to maximize profits and minimize wasted cash
flow. A costing method is the framework for effective monitoring of these
parameters. Costing methods for manufacturing are accounting techniques that
are used to help understand the value of inputs and outputs in a production
process. The right product costing methods in manufacturing helps to make
informed decisions about production levels, pricing, competitive strategy, future
investment, and a host of other concerns.
Costing methodology for best pricing decisions
All manufacturing environments have a specific costing and pricing philosophy
that guides them in the selection of the right costing methodology to employ.
However two important Costing help in finding Manufacturing Costs. They are
Inventory Costing and Product Costing
INVENTORY COSTING
Inventory includes the raw materials, work-in-process, and finished goods that a
company has on hand for its own production processes or for sale to customers.
Inventory is considered an asset for the business and the valuation of inventory
has a direct bearing on the amount of expense charged to the cost of goods sold
in an accounting period, and therefore on the amount of income earned. The
product costing methods in manufacturing takes in to account the cost assigned
to the inventory at hand and there are several costing methods to ascertain that:
First-in, First-out (FIFO) – FIFO determines the price of inventories based on
the date they were received or the date of manufacture. Businesses that trade in
foodstuffs and other goods generally use the FIFO method. Since the goods
have a limited shelf life the oldest goods need to be sold before they pass their
sell-by date.
Last-in, First-out (LIFO) – This method determines the price of inventories
under the assumption that the last item of inventory purchased is the first one
sold.
Weighted Average - The weighted average cost method is most commonly used
in manufacturing businesses where inventories are piled or mixed together and
cannot be differentiated, such as chemicals, oils, etc. In this method you work
out an average cost per unit at each point in time after a purchase.
Specification identification – This determines the specific cost of each item
used in the production process or sold. This method is effective for companies
that purchase expensive items.

Product Costing
Product Costing methods in manufacturing involves techniques that evaluate the
various components and activities involved in production; finding
Manufacturing Costs and determining the optimal product cost. There are
number of varying Costing methods for manufacturing to choose from, the
major production costing approaches employed are as follows:
JOB COSTING
Job costing (variable costing) considers the materials, labor and overhead costs
and maps them to a production process to determine the cost. This type of
costing is used primarily by make-to-order production environments.
STANDARD COSTING
This is one of the most common costing methodologies employed by
manufacturing operations. Here the organization establishs "standard" rates for
materials and labor that are used in production and / or inventory.
ACTIVITY - BASE COSTING (ABC COSTING)
This method aligns an organization’s resources and their activity to the
company’s products and/or services as it relates to their cost consumption. This
incorporates more indirect costs into direct production activities to help drive
pricing decisions.
DIRECT COSTING
Direct costing is a costing methodology that only looks at variable costs (i.e.
costs that increase or decrease proportionally with production output). It does
not consider fixed costs.
TARGET COSTING
Target costing takes a different approach to costing; for unlike other methods
this attempts to predict future costs and how those costs impact product pricing
and desired profit margins.

ADVANTAGES AND DRAWBACKS:

Let us analyze the benefits and drawbacks of these Costing methods for
manufacturing
1. JOB COSTING:
ADVANTAGES:
 Organization can track the exact cost to build one or more products and it
allows them to decide the optimal price to realize the desired profit
margin.
 Direct costs are easily attributable to a product, and hence this method
can yield very accurate quoting / pricing.

DISADVANTAGES:
 Large amount of effort is required to track all the different costs
continually.
 Requires efficient software applications to accurately manage and update
production costs correctly.

2. STANDARD COSTING:
ADVANTAGES:
 When actual rates or duration of production varies from standard they can
be monitored effectively.
 Allows organizations to examine trends and make the appropriate
modifications to their standards as needed which helps with accurate
pricing decisions.

DISADVANTAGES:
  The actual time and expense required to set and maintain standards
assigned to production activities (i.e. engineering, materials, and
overhead) is very high.
 Can lead to lower efficiency and profitability.

3. ACTIVITY BASED COSTING (ABC)

ADVANTAGES:
 Helps organizations gain clarity into products that are profitable and those
that are not.
 Helps to determine a product’s life cycle, and identify areas where
process improvement could produce better yields for existing products.
 Helps organization’s cost control activities, as better and more accurate
product lifecycle decisions can be made.

DISADVANTAGES:
The amount of effort and the additional cost required to gain cost clarity may
not be worth the benefits received.

4. DIRECT COSTING:
ADVANTAGES:
Direct costing has merit as an analysis tool for helping management make short-
term pricing decisions.
DISADVANTAGES:
This is only useful for short-term decision making as it does not have a good
handle on overhead costs.

5. TARGET COSTING:
ADVANTAGES:
 By trying to be proactive in product cost estimation, it provides
organizations a better opportunity to achieve a desired profit margin.
 Products which do not meet a desired product level can be discontinued.
DIADVANTAGES:
 This costing / pricing model is costlier as it requires a larger staff to keep
track of future trends and
 The method can also extend a products development cycle time.

BIBLIOGRAPHY
1. https://www.agaraminfotech.com
2. https://www.yourarticlelibrary.com