Chapter 16


‘Watch the costs and the profits will take care of themselves.’

Andrew Carnegie, quoted in R. Sobel and D.B. Silicia (1986), The Entrepreneurs – An American Adventure (Houghton Mifflin)Source: Wiley Book of Business Quotations (1998), p. 89.


Learning Outcomes

After completing this chapter you should be able to:

  • Explain the nature and importance of costing.
  • Discuss the process of traditional costing.
  • Understand the nature of activity-based costing.
  • Distinguish between different costing systems.
  • Discuss target costing.

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Chapter Summary

  • Costing is a subset of cost accounting and is used as a basis for inventory valuation and for cost-plus pricing.
  • There are direct costs and indirect costs or overheads.
  • The six stages in traditional cost recovery are:

    (1) recording costs

    (2) classifying costs

    (3) allocating indirect costs to departments

    (4) reapportioning costs from service to productive departments

    (5) calculating an overhead recovery rate, and

    (6) absorbing costs into products and services.

  • Activity-based costing is a sophisticated version of cost recovery which uses cost allocation drivers based on activities to allocate costs.
  • Different industries have different costing ...

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