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CHAPTER 11: MANAGEMENT ACCOUNTING TECHNIQUE (different between absorption…
CHAPTER 11: MANAGEMENT ACCOUNTING TECHNIQUE
ABSORPTION COSTING
(full costing)
DEFINITION: : it is costing system which treats all manufacturing costs including
both the fixed and varible costs as product costs
MARGINAL COSTING
(VARIABLE MANUFACTURING COST)
DEFINITION: it is costing system which treats
only the variable manufacturing costs
as product costs. the fixed manufacturing overheads are regarded as period cost
different between absorption cost and marginal cost
treatment for fixed manufacturing overheds
absorption costing:
Fixed manufacturing overheads are treated
as product costing
. it is believed that products cannot be produced without the resources provided by fixed manufacturing overheads
marginal costing:
fixed manufacturing overhead are treated
as period costs
. it is believed that only the variable costs are relevant to decision-making. fixed manufacturing overheads will be incurred regardless there is production or not.
Value of closing stock:
Absorption costing:
High value of closing stock will be obtained as some
factory overheads are included as product costs
and carried forward as closing stock.
Marginal costing:
Lower value
of closing stock that included the
variable cost only
Reported profit:
if the production= Sales, AC profit=MC profit
if production > Sales, AC profit > MC profit
If Production < Sales, AC profit < MC profit
ARGUMENTS
ABSORPTION COSTING
compliance with the generally accepted accounting principles
importance of fixed overheads for production
avoidance of fictitious profit or loss
MARGINAL COSTING
more relevance to decision-making
avoidance of profit manipulation
: marginal costing can avoid profit manipulation by adjusting the stock level
consideration given to fixed cost
: in fact, marginal costing does not ignore fixed costs in setting the selling price. on the contrary, it provides useful information for break-even analysis that indicates whether fixed costs can be converted with the change in sales volume
as some factory overhead will be deferred as product costs under the absorption costing
as the previously deferred factory overhead will be released and charged as cost of goods sold