Methods and Techniques of Costing for CMA Intermediate

Understand Methods and Techniques of Costing

Key rules to remember

Method vs technique

Method = HOW costs are collected for a type of work; Technique = HOW cost data is analysed or used

Use this one-line test to classify any costing term in an MCQ.

Job costing

Cost of job = Direct material + Direct labour + Direct expenses + Overheads absorbed

Used where work is done to customer order, each order being distinct.

Batch costing

Cost per unit = Total batch cost ÷ Number of units in the batch

A batch is a group of identical units treated as one job.

Process costing (normal loss only)

Cost per unit = (Total process cost − Scrap value of normal loss) ÷ Expected output

Used for continuous or mass production through stages. This formula applies where there is normal loss only. Abnormal loss or abnormal gain is valued separately at the same cost per unit, and does not change the cost per unit of good output.

Contract costing

Each contract is a separate cost unit with its own contract account

Used for long-term construction and engineering projects at the customer's site.

Marginal cost equation

Contribution = Sales − Variable cost; Profit = Contribution − Fixed cost

Technique that values stock at variable cost only.

Standard cost variance

For cost items: Variance = Standard cost − Actual cost (positive = favourable). For sales or profit items: Variance = Actual − Standard (positive = favourable)

Technique that compares actual with predetermined standards. The sign convention differs for costs and for sales or profit, so check which type of item you are dealing with.

How to solve Methods and Techniques of Costing questions

1. 1Read the question and decide whether it asks about a method (how costs are collected) or a technique (how data is analysed).
2. 2Look at the nature of work: customer order, group of units, continuous flow, long project at a site, or a service.
3. 3Match the work to the method: order - job; group of identical units - batch; continuous flow - process; project - contract; service - operating or service costing.
4. 4If the question mentions fixed and variable split, standards and variances, or full absorption, it is describing a technique.
5. 5State the definition in one line, then give the reason it fits the situation.
6. 6Add one or two industry examples to support your choice.
7. 7For a 'distinguish' question, write point-wise comparison on basis of purpose, cost unit, cost collection and example.
8. 8If both are asked, say clearly that the technique can be used with the method.

Quickest way: Three-second classification test

Common mistakes in Methods and Techniques of Costing

• Calling marginal costing or standard costing a method of costing.

  Both words 'costing' and 'method' feel interchangeable, and many books use loose language.

  Fix: Remember that marginal, standard and absorption costing are techniques. Methods are tied to the type of work.

• Saying a company must choose either a method or a technique.

  Students treat the two lists as alternatives.

  Fix: State that a method gives the base and a technique is applied over it. For example, process costing with standard costing.

• Confusing job costing with batch costing.

  Both use job cost sheets and work orders.

  Fix: In job costing each order is unique. In batch costing a group of identical units is costed together and cost per unit is found by dividing the batch cost.

• Using process costing for contract work because both run for long periods.

  Students focus on duration instead of the cost unit.

  Fix: Process costing handles continuous, homogeneous output through stages. Contract costing handles one large project at a site with a separate account per contract.

• Writing a distinction answer as two separate definitions without comparison points.

  Students run out of time or are unsure of format.

  Fix: Use point-wise bases such as meaning, purpose, examples and cost unit so that each point earns step marks.

Worked examples