Product costing is the process of determining the cost of a unit of production through studying the resource utilization for it. 2 approaches: absorption costing and marginal costing.
Absorption Costing
All manufacturing costs are absorbed by the units produced. The cost of a finished unit in inventory includes direct materials, direct labor, and both variable and fixed manufacturing overhead.
Also called full costing or the full absorption method. Required for external financial reporting and income tax reporting.
Marginal Costing
A costing technique where only variable or direct cost is charged to the cost unit produced.
- Fixed costs are never charged to production, treated as a period charge, and written off to the comprehensive income statement in the period incurred.
- Fixed manufacturing overhead costs are not allocated to, not absorbed by, the products manufactured.
- Useful for management decision-making.
Marginal Cost
The cost of one additional unit of output. The additional cost needed to produce one more unit of a good or service.
Cost Classification
Product Cost
- Absorption costing
Direct materials, direct labor, variable manufacturing overhead, fixed manufacturing overhead. - Marginal costing
Direct materials, direct labor, variable manufacturing overhead.
Period Cost
- Absorption costing
Variable non-manufacturing overhead expenses, fixed non-manufacturing overhead expenses. - Marginal costing
Fixed manufacturing overhead, variable non-manufacturing overhead expenses, fixed non-manufacturing overhead expenses.