In the paper “Performance Management: Gwent Housing Association” the author analyzes adaptation of suitable budgeting and costing techniques within the organization to reduce the impact of the economic recession. The boost in performance was only deemed to be achievable…
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The recent conference conducted by the Chartered Institute of Management Accountants heavily emphasized on creating value and improving performance during such torrid times. The boost in performance and the value creation was only deemed to be achievable if certain costing techniques were followed and those different costing techniques are evaluated further in order to give a better picture. Evaluation of the techniques discussed Marginal Costing “Marginal costing is a costing methodology that takes into account only the variable or marginal costs in the valuation of the cost of sales” (Mtetwa, 2010). The marginal costing technique values the stock at variable production cost. Marginal cost is considered to be the cost of producing an additional item or product and in marginal costing technique, only these techniques are allocated as the costs of sales while the fixed costs are treated as pertaining to a particular period and are allocated in full against the profit of the period in which they are sustained. Marginal costing technique is a good decision-making tool, the basic issue with marginal costing is that the use of this technique would alter the contribution with respect to the number of products sold which means that profits would increase with respect to the additional number of products sold, this would be as a result of the extra contribution earned. The drawback within Marginal Costing is that it ignores the prepaid sunk costs and any future committed costs within the short-term, this, as a result, affects the profit statement of the firm within the medium and the long-term (Steven, 2005). Absorption Costing “Absorption costing is a costing method which charges both variable and fixed costs in the valuation of the cost of sales” (Mtetwa, 2010). Absorption costing is a three-stage technique which involves allocation, apportionment, and absorption. The allocation step involves the direct overhead costs to be charged to their respective cost centers/units. The apportionment stage involves charging the overhead costs through primary and secondary apportionment. Primary apportionment involves charging overhead costs to both productions as well as the service cost centers while secondary apportionment engages the non-production and the service costs to the production centers. Finally, the overheads are absorbed into the production costs using a suitable absorption rate. This overhead absorption rate is based upon the budgeted costs and the budgeted activity levels. With absorption costing, there is no relationship between profit and the sales volume (as seen in Marginal costing). Under absorption costing, the revenue and the total profit would increase with respect to the total gross profit per unit and the amount of the overhead absorbed per unit. The mere benefit of using absorption costing is that it includes the entire costs pertaining to a particular product and hence this helps in better pricing of the product. The only setback of this method is that it is a rather complex method of monitoring profitability (Smith, 2007). Activity Based Costing Activity-based costing, also known as ABC, is a costing technique that has evolved rapidly and has made a huge mark within management accountants.
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