2.2 Traditional costing methods

2026 Syllabus Objectives

2.2.1 Costing applications

You need to know:

  • how to use traditional costing methods to prepare costing statements
  • how to apply unit costing, job costing and batch costing
  • how these methods can be used in both manufacturing businesses and service businesses, where suitable

2.2.2 Absorption costing

You need to know:

  • the difference between a cost centre and a cost unit
  • how to allocate and apportion overheads between production and service departments
  • how to calculate overhead absorption rates using a suitable basis
  • the causes of under-absorption and over-absorption of overheads, and how to calculate them
  • how to prepare costing statements and profit statements using absorption costing
  • the uses and limitations of absorption costing
  • how absorption cost data helps managers make decisions
  • the importance of non-financial factors

2.2.3 Marginal costing

You need to know:

  • how to calculate contribution
  • how to interpret a break-even chart
    (you do not need to draw one)
  • how to calculate:
    • break-even point
    • contribution to sales ratio
    • target profit output or sales
    • margin of safety
  • the uses and limitations of break-even analysis
  • how to prepare costing statements and profit statements using marginal costing
  • how to prepare a reconciliation statement between marginal costing profit and absorption costing profit
  • the uses and limitations of marginal costing
  • how marginal costing supports decisions such as:
    • make or buy
    • special orders
    • closure of a business unit
    • limiting factors
    • target profit
  • the importance of non-financial factors

2.2.4 Cost–volume–profit analysis

You need to know:

  • the advantages and limitations of cost–volume–profit analysis
  • how cost–volume–profit data helps management decision-making
  • how to use costing information to make business decisions and recommendations
  • the importance of non-financial factors

Main Content

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1. What are traditional costing methods?

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Traditional costing methods are ways of finding out how much it costs a business to make a product or provide a service. Managers need this information because they must make decisions such as:

  • What price should we charge?
  • Are we making a profit?
  • Should we accept a special order?
  • Should we carry on making a product?
  • Which product should we make more of if materials or labour are limited?

The main traditional costing methods in this topic are:

  • Unit costing
  • Job costing
  • Batch costing
  • Absorption costing
  • Marginal costing
  • Cost–volume–profit analysis

These methods are all part of management accounting. This means they are used mainly inside the business to help managers plan, control and decide.

2. Cost units and cost centres

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Before learning the methods, you must understand two very important ideas.

Cost unit

A cost unit is the thing we are finding the cost of.

It might be:

  • one bottle of shampoo
  • one shirt
  • one job, such as repairing a car
  • one batch, such as 500 chairs
  • one service, such as a photoshoot

So, a cost unit is simply the unit of output being costed.

Cost centre

A cost centre is a part of the business where costs are collected.

It is often:

  • a department
  • a machine
  • a process
  • a person

Examples:

  • Assembly department
  • Painting department
  • Canteen
  • Maintenance department

Difference between them

  • A cost unit is what is being costed
  • A cost centre is where costs are collected

Example: If a business makes tables:

  • one table may be the cost unit
  • the cutting department may be a cost centre

This difference is very important in absorption costing.

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