Application of Absorption Costing and Marginal Costing Report

This report delves into the application of absorption and marginal costing techniques within performance management. It begins by defining and differentiating between marginal and absorption costing, highlighting their features and uses in inventory valuation, cost classification, and sales policy design. A literature review provides insights from various researchers on the differences between the two costing methods, their impact on profit statements, and their roles in internal decision-making. The report then offers a critical analysis of these methods, including their applications in managerial decision-making, such as predicting optimal selling prices and choosing product mixes. Furthermore, the report examines various types of risks associated with business transactions, including operational, financial, exchange rate, legal, and market risks, and their impact on business performance. Finally, the report emphasizes the importance of effective decision-making techniques in performance management, such as the Delphi method and brainstorming, to achieve organizational goals and objectives.

Performance Management

Cost & management accounting Techniques
Application of absorption costing & marginal costing
Marginal costing is defined as the costing which distinguishes variable costs and fixed
costs. The main features of the marginal cost include inventory valuation, cost
classification, and marginal contribution. The technique of cost classification is used to
differentiate between fixed and variable costs and variable cost is further used to design
the sales policies (DRURY, 2013). The inventory valuation is used for profit
measurement is valued at marginal cost. It is also used to judge the profitability of
different products. It also helps to develop short-term planning, and it is also used to
control costs.
The absorption cost is the method for accumulating the costs which are related to the
production process, and it is used to develop the inventory valuation which is stated in
the balance sheet of the company. It is used for activity-based costing in order to
allocate overhead costs for the inventory valuation. It is used to maintain the cost in an
effective manner in accordance with IFRS and GAAP.
Literature review
According to Iyiola and Oyerinde (2009) accountability is also called as management of
funds and control which the sensitive aspect of organizational activities. According to
Tebogo (2010) absorption costing and marginal costing are the methods of costing
which is used to create profit statements, assist with pricing decisions, and value
inventory. Both the 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
only absorb only variable cost of manufacturing. The method of costing affects on
preparing 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 used
to 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 which
contributes towards the manufacturing overhead within the specific period of time (Bös,
2014). Variable costs are also known as marginal costing. According to the lal and
Srivastava (2008), the product cost is not considered as fixed manufacturing overhead
in the inventory valuation process.
Critical analysis
From the above literature review and previous research on the applicability of marginal
costing and absorption costing it is shown that both are different from each other. The
marginal costing technique is decision making in a manufacturing costing through
absorbing the cost of the manufacturing (Weygandt, 2015). There are various
applications of the marginal costing techniques such as managerial decision related to
the prediction of optimum selling place, to determine the effect of reduction in current
price on the profitability of the company, choosing of good product mix, calculation of
margin of safety, and decision regarding the selling of products and services at
distinguishes prices to the different customers.

Risk & uncertainty
Risk in business performance
There are various types of risks which are associated with the business transactions of
the company such as operational risk, financial risk, marketing risk, exchange rate risks,
legal risk, and environmental risks. The risks are explained below:
 Operational risks
It is the related to the business operations which leads to the failure of the
operational plan that directly impacts on the sales volume of the company.
 Financial risks
It is related to the financial transactions of the company, and it includes risk related
to the company loan that leads to the financial loss.
 Exchange rate risks
It is also known as currency risks which occur at the time of currency exchange
which leads to the devaluation of investment.
 Legal risks
It is the risk which arises due to the failure to comply with regulatory or statutory
obligation on the business transaction.
 Market risk
It is the systematic risk which cannot be completely eliminated, but it can be
diversified (Chen, 2013).

All risks need to be managed as it directly impacts on the business performance which
leads to the minimization of sales volume of the company. The risk management
process helps to manage the performance of the company.
Decision making in performance management
The decision making is one of the critical factors which directly impacts on the overall
business performance of the company. All risks need to be managed in order to
manage the performance of the company in a most efficient and effective manner.
There are various effective decision-making techniques such as Delphi method,
electronic meeting, multi-voting method, brainstorming, nominal group techniques, and
others which help to take appropriate decision that enhance the performance of the
company within the specific period of time. The decision making helps to achieve the
mission and vision of the company through managing the performance of business
resources in an effective manner. The appropriate decision making helps to provide the
competitive advantage to the company through taking the effective decisions towards
the achievements of goals and objective of the company. For example, the training and
development decision is taken by the company in order to improve the business
performance which helps to gain the skills and knowledge in order to perform their roles
and responsibilities in an effective manner that directly improve the performance of the
company. The performance management decision includes increment in compensation,
reduction of work pressure, and others which help to improve the performance of
employees (Kaplan, 2015).

References
DRURY, C. M. (2013). Management and cost accounting. Springer.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth
International Student Edition. WW Norton & Company.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial
Accounting. John Wiley & Sons.
Bös, D. (2014). Public enterprise economics: theory and application (Vol. 23). Elsevier.
Chen, Y. C., Chiu, Y. H., Huang, C. W., & Tu, C. H. (2013). The analysis of bank
business performance and market risk—Applying Fuzzy DEA. Economic Modelling, 32,
225-232.
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI
Learning.