After the organization has allocated the indirect costs and some direct costs by a method that ensures that customers are paying for only the costs of the services and products they received, the organization develops methods of assembling costs in ways that are meaningful for management.
Three methods exist; most organizations use more than one method.
1. Responsibility Costing
Responsibility costing is a method of assembling costs by responsibility center (cost center or department). In this way, the organizations can hold managers responsible for the controllable costs of the organization.
A method of assembling costs by cost center or department.
2. Full Costing
Full costing is a method of assembling direct costs and an allocated share of indirect costs to a product or service for the purpose of determining its profitability.
A method of assembling direct and indirect costs to a product or service to determine its profitability.
3. Differential Costing
Differential costing (sometimes called incremental costing or relevant costing) is a method of assembling costs and sometimes revenues to alternative decisions. In this method, sunk costs (i.e., costs that have already occurred) are not relevant; incremental or differential costs (i.e., costs that differ between the alternative decisions) are relevant. Generally, such an analysis involves the following steps
A method of assembling costs and sometimes revenues to alternative decisions.
- Gathering all costs and revenues associated with each alternative
- Identifying and dropping all sunk costs
- Identifying and dropping all costs and revenues that do not differ between the alternatives
- Selecting the best alternative based on the remaining cost and revenue information