Comparison between marginal and absorption costing, Cost Accounting

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Comparison between Marginal Costing and Absorption Costing

There are accountants who favour all costing method.

Arguments in favour about absorption costing are specified as:

  1. To make output fixed production costs are incurred; consequently it is 'fair' to charge all output along with a share of these costs.
  2. Closing stock values via involving a share of fixed production overhead will be valued on the principle required for the financial accounting valuation of stocks via Standard accounting practice' statement on stocks and long-term contracts as SSAP 9.
  3. A problem along with calculating the contribution of various products made via a company is such it may not be clear whether the contribution earned via each product is sufficient to cover fixed costs, whereas via charging fixed overhead to a product it is probable to ascertain if it is profitable or not.

Arguments in favour about marginal costing are specified as:

  1. It is easy to operate
  2. There are no apportionments that are frequently done on the arbitrary basis, of fixed costs. Many costs, as like the managing director's salary, are indivisible along with nature.
  3. Fixed costs will be the similar regardless of the volume of output, since they are period costs. It makes as hence, to charge them in full like a cost to the period.
  4. The cost to make an extra unit is the variable production cost. It is realistic to value closing stock items at its directly attributable cost.
  5. Beneath or over absorption of overheads is avoided.
  6. Marginal costing information can be required for decision-making however absorption costing information is not appropriate for decision-making.
  7. Fixed costs as like depreciation, rent and salaries concern to a period of time and must be charged against the revenues of the period whether they are incurred.

Obviously, the choice of method does not have to be between marginal costing and absorption costing. Now we looked at ABC like an alternative to absorption costing.  Attributable contribution costing is one more alternative. This includes attributing certain fixed costs to the activities that cause them and then utilizing marginal costing to compute a contribution for every activity, the surplus of contribution over attributable fixed costs being known like attributable contribution.

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