Contrast and Compare Absorption Costing with Marginal Costing Essay

Contrast and Compare Absorption Costing with Marginal Costing - Essay Example The Strict adherence to a particular costing method is critically important to effectively managing the finance in a firm since its management will be bale to make proper appraisal of the productivity as well as performance of various costs units in the firm. This piece of research reviews full costing and variable costing and outlines the conceptual framework and key assumptions of these cost methods. This paper compares and contrasts these approaches to product and services costing with a view to explain whether the choice of full costing or variable costing still matter or not. Full Costing: Conceptual Framework and key assumptions Full costing, also commonly termed as Absorption Costing, refers to a costing method in which all manufacturing costs, including variable as well as fixed costs, are attributed to the production costs. Hilton, Maher and Selto (200, p. 58) stated that full costing applies all manufacturing-overheads to manufactured goods along with direct materials and d irect labor costs. Full costing is also termed as absorption costing because it absorbs and recovers both fixed and variable costs (Heisinger, 2009, p. 276). The cost incurred for the production of a unit is considered as variable cost per unit plus an allocated share of the fixed overheads (Jawahar-Lal, 2008, p. 627, Nigam, Nigam and Jain, 2004, p. 398). In full costing, direct costs are directly allocated to the cost units and manufacturing overhead-costs are taken to the product and other overheads. Direct material costs and direct labor costs are variable costs and these are directly attributed to the product. But, fixed costs are charged over different products that the firm manufactures over a given period of time (Williams, Haka and Bettner, 2004, p. 923, Jiambalvo, 2009, p. 181). Inventory costs should include all production overheads with fixed as well as variable costs and therefore SSAP 9 considers Full Costing as an essential requirement for the external reporting purpos es if the firm has to undergo it (Broadbent, Broadbent and Cullen, 2003, p. 92). In Full Costing method, the demand of the product is never considered, but prices are considered as the functions of the costs. Full costing includes pasts costs that may not always be relevant to the present decision making purposes and pricing determinants (Jackson, Sawyers and Jenkins, 2008, p. 228, Drury. 2006, p. 227) In Full Costing method, the demand of the product is never considered, but prices are considered as the functions of the costs. Full costing includes pasts costs that may not always be relevant to the present decision making purposes and pricing determinants. It is therefore criticized that Full costing may not be able to provide reliable and accurate information in order to make decision making be effective (Boardguess, 2009). Variable Costing: Conceptual Framework and key assumptions As detailed above, Full costing includes direct materials, direct labors and both variable and fixed manufacturing overheads that are incurred in manufacturing a product. In contrast, variable costing doesn’