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The first factor is costing. Costing concerns setting a price for a product or service so that a profit is made and arriving at a correct valuation for stock. (Jones, 2012). The reason why cost are used in many different ways is to fulfil the need of management according to their department. For example, for the purpose of accounting for costs in manufacturing companies, cost are classified into two divisions which are manufacturing costs and non-manufacturing cost. Manufacturing cost consist of direct materials, direct labour and manufacturing overhead while non-manufacturing costs consist of selling costs and administrative cost. Another example is for the purpose of preparing financial statements, costs are classified into product costs and period costs. Tools and techniques that used to drive costing factor are absorption costing and activity based costing.
Absorption costing is the method under which all manufacturing costs, both variable and fixed, are treated as product costs with non-manufacturing costs, for example, selling and administrative expenses, being treated as period costs.
Absorption costing treats all manufacturing cost as product costs, regardless of whether they are variable or fixed. The cost of a unit of product under the absorption costing method consists of direct materials, direct labor, and both variable and fixed manufacturing overhead. Thus, absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing costs. Because absorption costing includes all manufacturing costs in product costs, it is frequently referred to as the full cost method (Garrison, Noreen & Brewer, 2009 –

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