Sampling Assignment
This Report introduces, identifies, compares and comments on the advantages and disadvantages of Absorption and Marginal costing methods, highlighting the key differences between them with a background explanation in relation to, types and classification of costs, allocation and apportionment and to identify its place within management accounting. In Management accounting, the process of measuring and recording all costs within a business is needed in order for there to be an effective accounting system, this process is known as Cost accounting. There are many advantages to managers which cost accounting techniques provide, being in cost information, where by mangers are more able to make sensible decisions towards their business objectives. For instance if a business is trying to decide whether or not to continue the production a product out of 6 items, there will be little if any information, as to the amount each item contributes to the profitability of the business, without Cost accounting.
Before detailing about these methods there are 3 main elements of costs used within the methods, which are fixed, variable and semi variable costs. Fixed cost are costs that tend not to be affected by fluctuations in activity for example rent for the year of a premises, where as a variable cost varies in direct proportion to the level or volume of activity, so for instance the greater number of plastic toys produced, the greater the cost of plastic materials. Lastly a semi variable cost is a cost comprising of both fixed and variable parts and therefore is partly affected by changes in activity but not in direct proportion as variable costs are. These costs are important to distinguish as they are then classified from labour costs, materials and overheads as either direct or indirect costs(directly or indirectly related to the product) terms which will be mentioned when describing the two costing methods following. (Paraphrased definitions incorporated into above text
Before detailing about these methods there are 3 main elements of costs used within the methods, which are fixed, variable and semi variable costs. Fixed cost are costs that tend not to be affected by fluctuations in activity for example rent for the year of a premises, where as a variable cost varies in direct proportion to the level or volume of activity, so for instance the greater number of plastic toys produced, the greater the cost of plastic materials. Lastly a semi variable cost is a cost comprising of both fixed and variable parts and therefore is partly affected by changes in activity but not in direct proportion as variable costs are. These costs are important to distinguish as they are then classified from labour costs, materials and overheads as either direct or indirect costs(directly or indirectly related to the product) terms which will be mentioned when describing the two costing methods following. (Paraphrased definitions incorporated into above text
References: , 1. Wood, Frank & Sangster, Alan, Business Accounting 1, 9th edition, (England: Pearson education ltd.), 2002. 2. Davies, Tony & Crawford Ian, Business Accounting and Finance, 1st edition, (England: Pearson education ltd.) 3. Lucey, Terry, Costing, 5th edition,(England: Letts educational ltd.), 1996. 1. Davies, Tony & Crawford Ian, Business Accounting and Finance, 1st edition, (England: Pearson education ltd.), 2011. 2. Wood, Frank & Sangster, Alan, Business Accounting 2, 9th edition, (England: Pearson education ltd.), 2002. 3. Wood, Frank & Sangster, Alan, Business Accounting 1, 9th edition, (England: Pearson education ltd.), 2002. 4. Lucey, Terry, Costing, 5th edition,(England: Letts educational ltd.), 1996. 5. Glautier, B.W.E., Underdown.B, Cost Accounting, 1st edition, (Great Britain: Pitman Publishing), 1988. 6. Merrills, Claire, Halls-Bryan, Jacqueline, AQA Accounting A2, (United Kingdom: Nelson Thornes), 2009.