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Distinction between Absorption and Marginal Costing
These are two approaches of arriving at the cost of production or total profit for a specified period. The major difference between marginal costing and absorption costing is on the treatment of the fixed cost.
In absorption costing both fixed and variable production costs are involved in the determination of the cost of a product. This implies such the fixed cost is treated like a product cost and not a period expense. It is significant for the student to note the term "fixed production costs" like they are the only costs that create the difference between the absorption and marginal in costs of production.
In marginal costing only variable costs are involved in the determination of the production cost. This implies such fixed costs are treated like period costs as:
Constant Gross Margin Rate This method assumes that every product contributes an equal percentage of gross profit for every shilling of sales. It works back from gross margin
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selection of activity base/level
USES O F CVP ANALYSIS 1. .It allows preparation of flexible budgets. 2. It provides help in forecasting accurate profit. 3. It aids in formulating price policy. 4
MARGINAL COSTING IS PREFERRED TO ABSORPTION COSTING IN DECISION MAKING WHY
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