Performance Management & Cost Management Accounting
Added on - Sep 2019
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Cost & management accounting TechniquesApplication of absorption costing & marginal costingMarginal 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. It is used for activity-based costing in order toallocate overhead costs for the inventory valuation, and is used to maintain the cost inan effectivemanner in accordance with IFRS and GAAP.Literature reviewAccording to Iyiola and Oyerinde (2009) accountability is also called as management offunds and control which the sensitive aspect of organizational activities. According toTebogo (2010) absorption costing and marginal costing are the methods of costingwhich is used to create profit statements, assist with pricing decisions, and valueinventory. Both the costing methods have differences which can be reconciled.According to Seiler (1959), the absorption method is used to value all the inventory ofthe company which includes fixed as well as variable costs whereas the marginal costsonly absorb only variable cost of manufacturing. The method of costing affects onpreparing the profit statement of the company (Varian, 2014). On the other hand, Hoare(2010) explained the marginal accounting use for the internal decision-making process.
The fixed costs are incurred regardless of the units produced, and marginal cost is usedto determine the contribution of the variable cost in the overall cost of manufacturing.The variable cost includes direct labor, direct material, and another direct cost whichcontributes towards the manufacturing overhead within the specific period of time (Bös,2014). Variable costs are also known as marginal costing. According to thelal andSrivastava (2008), the product cost is not considered as fixed manufacturing overheadin the inventory valuation process.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 variousapplications of the marginal costing techniques such as managerial decision related tothe prediction of optimum selling place, to determine the effect of reduction in currentprice on the profitability of the company, choosing of good product mix, calculation ofmargin of safety, and decision regarding the selling of products and services atdistinguishes prices to the different customers.Risk & uncertaintyRisk in business performanceThere are various types of risks which are associated with the business transactions ofthe company such as operational risk, financial risk, marketing risk, exchange rate risks,legal risk, and environmental risks. The risks are explained below:Operational risksIt is the related to the business operations which leads to the failure of theoperational plan that directly impacts on the sales volume of the company.Financial risks