Cost & Management Accounting Techniques
Added on - 25 Sep 2019
1. Cost & management accounting Techniques1.1 Application of absorption costing & marginal costing in businessMarginal costing is defined as the costing which distinguishes variable costs and fixedcosts. The main features of the marginal cost include inventory valuation, costclassification, and marginal contribution. The technique of cost classification is used todifferentiate between fixed and variable costs and variable cost is further used to designthe sales policies (DRURY, 2013). The inventory valuation is used for profitmeasurement is valued at marginal cost. It is also used to judge the profitability ofdifferent products. It also helps to develop short-term planning, and it is also used tocontrol costs.The absorption cost is the method for accumulating the costs which are related to theproduction process, and it is used to develop the inventory valuation which is stated inthe balance sheet of the company (Kee, 1995). According to the (Shields, 1995)It isused for activity-based costing in order to allocate overhead costs for the inventoryvaluation, and is used to maintain the cost in an effectivemanner in accordance withIFRS and GAAP.1.2 Literature Review and Critical Analysis of the techniques used1.2.1 Literature reviewAccording to Caplan (2013) accountability is also called as management of funds andcontrol which the sensitive aspect of organizational activities. According to Varian(2014) absorption costing and marginal costing are the methods of costing which isused to create profit statements, assist with pricing decisions, and value inventory. Boththe costing methods have differences which can be reconciled. According to Seiler(1959), the absorption method is used to value all the inventory of the company which
includes fixed as well as variable costs whereas the marginal costs absorb only variablecost of manufacturing. The method of costing affects on preparing the profit statementof the company (Varian, 2014). On the other hand, Lakmal (2014) explained thatmarginal accounting is used for the internal decision-making process. The fixed costsare incurred regardless of the units produced, and marginal cost is used to determinethe contribution of the variable cost in the overall cost of manufacturing. The variablecost includes direct labor, direct material, and another direct cost which contributestowards the manufacturing overhead within the specific period of time (Bös, 2014).Variable costs are also known as marginal costing. According to the Trần Triệu(2014),the product cost is not considered as fixed manufacturing overhead in the inventoryvaluation process.1.2.2 Critical analysisFrom the above literature review and previous research on the applicability of marginalcosting and absorption costing it is shown that both are different from each other. Themarginal costing technique is decision making in a manufacturing costing throughabsorbing the cost of the manufacturing (Weygandt, 2015).There are various applications of the marginal costing techniques such as managerialdecision related to the prediction of optimum selling place, to determine the effect ofreduction in current price on the profitability of the company, choosing of good productmix, calculation of margin of safety, and decision regarding the selling of products andservices at distinguished prices to the different customers (de Boer, 2014).The marginal costing technique include variable and fixed costs which is used to takemanagerial decision in order to increase the profitability of the company through takingdecision to control the variable cost structure of the company. It is mainly a technique ofanalysis which is used for cost information for the management guidance in order todetermine the impact of change in volume of output on the profitability of the companyfor example the manufacturing of a part need Y in raw material and Z in labour whichcannot be produced without overhead such as logistics and production management.