Cost Accounting Essay Example | Topics and Well Written Essays - 2500 words

Cost Accounting - Essay ExampleAbsorption apostrophize (also known as full equaling) is costing systems which includes direct materials, direct labour and multivariate and situated manufacturing crash as product cost (Duruy, 2011).This costing system is normally required for external reporting purposes beneath GAAP since accountants believe that fixed overhead is a crucial component in the manufacturing process (Deo, 2009).. A reason for this is that line of products valuation include all production cost under UK SAAP9 so that when profit increases the stock also increase (Pong, & Mitchell, 2004) On the other hand, Marginal or variable costing is costing system which includes all manufacturing cost that vary according to the number of units produced, which includes direct materials, direct labour and variable manufacturing overhead (Bhimani, 2011). Economists favour the use of marginal costing since it enhances profit maximisation (Deo, 2009) since stock increases lower the profit (Pong, & Mitchell, 2004). Theoretically, it is easy to identify the effects of the costing method used by an organization on profit. The costing method used in stock valuation therefore has an implication on profit as shown in the table below Movement increase decrease Valuation method used Full costing Variable costing High profit Low profit Lower profit Higher profit Several principles were congeal forward in attempts of supporting either of these costing methods. For instance, the matching principle, which holds that during profit calculation, revenues, must be matched with the costs incurred in generating the revenue (Pong and Mitchell, 2004). Assuming prices are constant, the variable costing method results in a time series of meshing that is in synch with the sales. This is considered an advantage of variable costing. The profit generated in this case is not subjected to whatever movements influence by changes in the stock level as the fixed costs are written off. Th is is found to concur with the realization principle that recognises profits as they occur (Pong and Mitchell, 2004). On the other hand, carrying forward fixed costs in the full costing method can boost profits in the case of rising stock. It is acknowledged that production activities can affect profitability via the levels of stock. However, this claim has been on the spotlight as it encourages managers to increase profitability by increase stock which may be dysfunctional to the firm (Pong and Mitchell, 2004). The main difference between absorption costing and managerial costing is the treatment of the fixed manufacturing overhead cost, which are treated as a period cost in variable costing (Durury, 2011, p.195). The two costing methods will be compared using the give data below. Year 1 Year 2 Sales Price 50 52 Direct Materials 10 10 Direct Labour 7 8 Variable Production overhead 5 5 Fixed Production overheads 4800 5700 Administration costs 4000 5000 Sales Volume 900 1400 Product ion 1100 1300 The unit cost for the absorption costing method was higher at ?26.36 than the ?22.00 for the marginal costing due to the addition of ?4.36 per unit in the first year. The unit cost for the twinkling year was also high for the absorption costing at ?27.38 when compared to the ?23.00 for the marginal costing. This comparison discovered that the unit cost for absorption costing was higher than the marginal costing because of the addition of the fixed manufacturing cost. The benefit of a two year comparisons is that it reveals how manufacturing cost are transferred in the absorption and managerial costing (Lere, 2000, p.29). The benefit of marginal costing is that fixed manufacturing overhead is already incurred even if there is no production for the period. (Durury,