In any company, it is essential to maintain a balanced budget. To do so, managers must know the enterprise’s finances well, as well as define strategies so that their incomes cover the needs of the business. It is no wonder that many use costing methods for this purpose.

In general, costing methods are tools used to identify expenses that involve the business’ processes, such as manufacturing and sales. Because there are different types, it is very important that the company assess their key characteristics and see which one fits best in its environment.

Therefore, in this text, we selected the main ones so that you can make the best choice for your enterprise! Check it out!

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Main costing methods

Before we begin, we need to define what variable and fixed cost is. Variable costs are those that change according to the volume of production, while fixed costs are those that remain stable regardless of what the company produces. That said, let’s learn about the methods. Keep reading!

Absorption

Also known as integral costing, its main characteristic is that all manufacturing expenses, whether direct or indirect, are taken into account when determining the final cost of sales. That is, expenses for structure, operation, etc., even if indirectly related to the product, end up influencing its final cost.

The advantage of this method is that it makes the investigation of the total cost of each product easier. However, there may be distortions in what is collected, which may unbalance the distribution of income for some products.

Variable

This is the most used by companies; it is a type of calculation that only uses information related to direct or indirect variable costs, not taking into account the fixed costs. It is a very beneficial method if the purpose is to determine the contribution margin of the enterprise or to clarify the product costs. However, as a disadvantage, the data found are not useful in the long term, and are also inadequate to define the company’s accounting.

ABC

Also known as Activity-Based Costing, this method is related to the company’s activities and not to the products or services. That is, for it, an enterprise’s expenses happen because of how the goods are made, and not because of what is produced.

For example, in a car parts factory, in addition to selling parts, there are other activities responsible for such production, such as assembly. By using this method, it is possible to measure how much of these activities are used in the manufacture of these goods.

It is the ideal method for identifying what is actually linked to costs, since it can measure expenses and overhead. However, the company needs to have a standardization of its processes, and it only works if the objective is in the long term.

Production Effort Unit (UEP)

This type of method uses a kind of unit to calculate a production. It can take products from different origins and measure them by what they have in common. That is, it uses the same parameter to determine its cost; thus, it is possible to have a broader view of the business activities.

Its advantage is in making the evaluation of the company’s productive capacity and the profitability of its equipment easier. However, it only serves to measure production and there is no way to measure losses or waste.

Standard

In this methodology a kind of anticipation of cost is made, that is, a margin of expenses is created before actually knowing what they are. Let’s say that it sets an ideal to be achieved, thus, it is possible to manage and determine variations in the company’s consumption.

It is very useful for setting the ideal expense amount that the company must achieve if it is operating perfectly. However, because it is not a method that is based on actual applications, it may not help the enterprise to improve its cost management.

We are sure that this text was very useful for you to understand about costing methods. Do you want to delve deeper into the subject? Then read our text on the ABC method right now!