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    COSTING ASSIGNMENT - RTF 2

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    COSTING ASSIGNMENT - RTF 2

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    COSTING ASSIGNMENT.rtf 2

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    6 views4 pages

    COSTING ASSIGNMENT - RTF 2

    Uploaded by

    selinawireko12

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    KWAME NKRUMAH UNIVERSITY OF SCIENCE AND TECHNOLOGY

    KNUST SCHOOL OF BUSINESS

    PROGRAM OPTION: ACCOUNTING

    COURSE: COST ACCOUNTING

    INDEX NUMBER: 8136521

    TOPIC: COMPARISM BETWEEN ABSOPRTION COSING AND MARGINAL


    COSTING

    ABSORPTION COSTING

    Absorption costing is a method of accounting that considers both variable and fixed costs
    when calculating the cost of a product. The main idea behind absorption costing is that all
    costs, whether they are variable or fixed should be assigned to the product being
    produced. This means a portion of the fixed overhead costs is included in the cost of each
    unit produced.This provides a comprehensive view of the cost of producing a product and
    helps in evaluating its overall profitability.

    However, absorption costing has some limitations as well. It can make it difficult to
    determine the true contributionmargin of a product, as fixed cost are spread across all
    units produced.

    Also,, fluctuations in production volume can impact the per unit cost, making it harder to
    analyse cost behaviour.

    MARGINAL COSTING:

    Marginal costing, also known as variable costing, is an accounting method that focuses
    on the variable costs associated with producing a product. In marginal costing,only
    variable costs like direct materials, direct labour,and variable overhead are considered
    when calculating the cost of a product.

    The main concept behind marginal costing is to separate fixed costs from the production
    cost. Fixed costs are treated as period expenses and are not allocated to the cost of each
    unit produced.

    Marginal costing offers flexibility incost control and performance evaluation. Since fixed
    costs are treated as period expenses, managers can easily identify the impact of changes
    in variable costs on the overall profitability of the product. This allows for better cost
    control and the ability to make informed decisions regarding pricing, production levels,
    and product profitability.

    It is important to note that marginal costing does not provide a comprehensive view of
    the total cost of producing a product. It does not consider fixed costs, which are
    neccessary for long term decision making and external reporting purposes.

    DIFFERENCES:

    1.Cost classification

    Absorption costing: It considers both variable and fixed costs as part of the product cost.
    Fixed costs are allocated to each unit produced

    Marginal costing: It focuses only on variable costs and traet fixed costs as period
    expenses that are not allocated to the cost of each unit.

    2. Profit calculation

    Absorption costing: Profit is calculated by deducting both fixed and variable costs from
    sales revenue.

    Marginal costing: Profit is calculated by deducting variable costs only from sales revenue.
    Fixed costs are treated as separate entity and not deducted from sales revenue.

    3.Decision making

    Absorption costing: It is commonly used for external reporting and evaluating the overall
    profitalbility of the product.

    Marginal costing: It is useful for internal decision making, as it provides a clearer view of
    the impacts of changes in variable costs on profitability.

    4.Effect of change in stock

    Absorption costing: The difference in opening and closing inventory affects the cost per
    unit due to the effect of fixed costs.

    Marginal costing: The cost per unit of a product does not get affected due to variation in
    opeining and closing stock.

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