Costing & Overheads

 Introduction 

Overheads : 

                   Overheads refers to the ongoing business expenses not directly related to the creating a product or services. It is important for making budget and also for determining how much a company must charge for its products or services to make a profit. 

          Example - If you have a production or manufacturing of goods based business, then apart from the direct cost of providing the production, you will also incur overhead costs such as rent of premises or building, utilities & insurance, cost of indirect consumables, Cost of safety items. 

Costing : 

               Cost means a price that that must be paid for something or a sacrifice. Cost most often refers to a specific amount of money that a seller wants for the item they are selling. However, cost is also used more generally to mean whatever the price of an item is. If the price is high or expensive, it is said to be costly. Cost is used as a verb to mean to require a payment or to cause the loss of something. 

             The meaning of costing is the process of calculating , how much a product or services will cost, or the actual calculation itself. 

           Costing is a systematic set of procedures for recording and reporting measurements of the costs of manufacturing goods and performing services in the aggregate and in detail. It includes methods of recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs.  

 

Full Costing Methods :

                             Full Costing is an accounting method used to determine the complete end - to - end cost of producing products or services. Full Costing is used to determine the complete and entire cost of products or services. The concept is most commonly used for recording the full cost of inventory in the financial investments. This type of costing required for financial reporting under several accounting frameworks, such as Generally Accepted Accounting Principles and International Financial Reporting Standards, as well as for Income Tax reporting. 

                             When using the full costing methods, there will be 3 - types of costs are assigned to the to the end product or services.

1) Direct Costs:

                        These are the expenses, which is directly related to the manufacturing process. They can include, staff wages, commission, the cost of raw materials used and any other overheads expenses which is directly related to the manufacturing process. 

2) Fixed Cost :

                       There are primarily overhead expenses which is fixed in manufacturing industries. These costs are not changeable at any stage of manufacturing processes. Example - Staff Salaries, building lease, that remain the same, regardless of how much or how little the company selling. A company must pay its office rent and salaries every month, even if it manufacturing nothing.

Example - Amortization, Depreciation, Insurance, Interest Expenses, Utilities. 

3) Variable Overhead Costs :

                          These are the indirect expenses of operating business that fluctuates with manufacturing activity. Example - When output rises additional staff may be hired to help out. 

Example - Shipping Cost, Office Supplies, Advertising & Marketing Costs, Consultancy Service Charges, Legal Expenses, Spares cost for maintenance and repair of equipment, energy bill.   

    

Conclusion : 

                   Costing is a system of recording and analyzing the cost of products or services in order to contribute towards strategic planning and improve cost efficiency. It's important for business, including management, employees and consumers. Costing act as a source of information like closing inventory, capital expenditure, direct and indirect costs, etc. for the preparation of financial accounts of an organization.