Absorption/Full Costing, Variable/Marginal Costing, And Activity Based Accounting

3100 words - 12 pages

Introduction
The contained paper has been prepared with objectives of elaborating over the three different costing methods namely, Absorption/Full Costing, Variable/Marginal Costing, and Activity Based accounting. The first segment of the report seeks to define and illustrate the costing methods based on the personal understanding of the writer gained through the class room and the academic readings. Part two of the report takes a form of short essay, written critically to evaluate the application of standard costing and variance analysis to any size of business, and concludes with a verdict that whether or not standard costing and variance analysis is applicable to each business with consideration of its costs and benefits of the system.
1.0. Part B – Costing Methods
1.1. Marginal/Variable Costing
Term “marginal” is extensively used and known with reference to the economics which means “extra”, whereas with economic view point the marginal cost is the cost of producing every extra unit; however the accounting terminology of “marginal” defines the cost incurred on production other than its fixed cost is the marginal cost. Simply, none of the technique is applied unless it serves the benefits and the marginal costing is used by the firms for its registered benefits. Among all its benefits the primary advantage it serves is its attempt to distinguish the fixed and variable costs, and the method only considers the related variable costs to be included in production cost and the fixed costs are thus later deducted out for ascertaining net profit. The inventory at the year-end is also valued on the bases of variable cost. With all these beneficial characteristics of the said system firms using marginal costing are clearly aware of its trends of cost price and selling price which is helpful for the management for decision making. Since the method is easy and the relationships of cost and selling price are known, the firm can meaningfully determine the breakeven point and also the necessary measures can be taken in state of high variable costs. However, despite its valuable benefits, the prime critique of the method informs its applicability of the method successful only in short run and is not deemed fruitful in the longer time frame. Although the system efforts to differentiate the fixed and variable costs, which however is not easy, hence any mistake in cost differentiating may lead to wrong decision making. With regard to valuation of inventory, since the inventory is valued at variable price in case of production damage the recovery value from insurance is unfavorable (Reinstein & Bayou, 1997).
1.2. Full/Absorption Costing
As the name says “absorption” this method of costing implies that all the manufacturing related costs are allocation to the production and is absorbed over the total production for the period. The per unit absorption cost is calculated based on the normal estimated production, which in the above example is estimated at 300 units....

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