Costing is any system for assigning costs to an element of a business. Costing is typically used to develop costs for any or all of the following:

  • Customers
  • Distribution channels
  • Employees
  • Geographic regions
  • Products
  • Product lines
  • Processes
  • Subsidiaries
  • Entire companies

Costing may involve only the assignment of variable costs, which are those costs that vary with some form of activity (such as sales or the number of employees). This type of costing is called direct costing. For example, the cost of materials varies with the number of units produced, and so is a variable cost.

Advantages of Efficient Costing:

Efficient costing has got the following advantages:

(i) It helps in tracing wastage, leakage and spoiled material.

(ii) It gives information regarding profitable and unprofitable activities.

(iii) It provides an effective check on wage systems.

(iv) Actual causes of reduction in profits can be easily found.

(v) It gives information, regarding component parts, whether it is profitable to manufac­ture them in the factory or to purchase from outside market.

(vi) It also helps in the settlement of wage rates with trade unions at the time of dispute.

(vii) It provides data for comparison between actual cost and estimated cost of an article.

(viii) It provides data for overhead charges etc. to assist in the preparation of estimates for future work.

(ix) It helps the management in forming the policies of price determination.

(x) It provides information of detailed expenditure, so that it can be checked when it is tending to exceed.

(xi) It keeps control over selling price.

(xii) The main advantages of costing is to compare the output of the persons of same trade and working on same type of machines.

(xiii) It helps in determining the efficiency of administrative and operative functions and decides the weak point, where wastage and expenses need check.

(xiv) It helps the planning department in deciding about the quantity of material required and the sequence of operations on the job.