Marginal Costing and Absorption Costing Approaches

Running head: MANAGEMENT ACCOUNTING MODEL
MANAGEMENT ACCOUNTING MODEL
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MANAGEMENT ACCOUNTING MODEL1
Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Answer to Question 1(a)..................................................................................................................3
Marginal Costing.........................................................................................................................3
Absorption Costing......................................................................................................................4
Underlying difference between marginal and absorption costing approach (Hall, 2018)...........4
Answer to Question 1(b)..................................................................................................................5
Theoretical Criticism of Marginal Costing (Pearce, 2016):........................................................5
Theoretical Criticism of Absorption Costing (Mikaeeli et al., 2015)..........................................6
Answer to Question 1 (C)................................................................................................................8
Practical Problems and ways to overcome problems in Marginal Costing.................................8
Practical Problems and ways to overcome problems in Absorption costing...............................9
Answer to Question 2 (a).................................................................................................................9
Answer to Question 2(b)................................................................................................................11
Answer to Question 2(c)................................................................................................................13
Answer to Question 2(d)................................................................................................................13
Answer to Question 2(e)................................................................................................................15
Answer to Question 3(a)................................................................................................................15
Answer to Question 3(b)................................................................................................................16

MANAGEMENT ACCOUNTING MODEL2
Conclusion.....................................................................................................................................16
Reference.......................................................................................................................................18

MANAGEMENT ACCOUNTING MODEL3
Introduction
Marginal costing and Absorption costing are two diverse types of approaches that are
used in inventory valuation by the company. The variable cost that is incurred by the company is
applied to the inventory under marginal costing whereas in absorption costing fixed as well as
variable costing sustained by the company are applied to the inventory. Therefore, the cost that
varies with a decision must only be involved in the decision-making analysis (Kaplan and
Atkinson, 2015).
Discussion
Answer to Question 1(a)
Marginal Costing
In marginal costing, only variable cost is gauged as the product cost, while the fixed cost
is regarded as the cost for the given period. Marginal costing might be demarcated as the practice
of presenting the cost data where the fixed costs and variable costs are shown distinctly for
managerial decision-making. This process of costing is different from job costing and batch
costing and is rather merely a process of analyzing cost information for the supervision of
management who stabs to figure out the result of profit owing to the change in the volume of
output (Aleem, Khan and Hamad, 2016).
Marginal costing technique has invented new concept of contribution. Contribution can
be derived by reducing the variable cost from the sales revenue is shown as the profit left before
the retrieval of the fixed cost. In case the firm does not make a profit nor suffers a loss, then the