Cost Accounting - Research Paper Example

Among the various costing methods, absorption costing and marginal costing are the two important tools that are widely used for managerial decision making. This piece of research paper describes the differences between these two methods and explains the arguments for and against these costing methods. Marginal Costing As Lucey and Lucey (2002, p. 296) defined, marginal costing is an accounting system in which variable costs are charged to some specific cost units for a period of time and fixed costs are fully written off against the total contribution, which is the value of sales less variable costs.

Marginal costing is widely used and is considered to be more effective and useful in the valuation of stocks and in the calculation of total costs of goods sold because of that only variable manufacturing costs are considered in this type of costing method. Variable manufacturing costs are considered in this costing method as they are attributed to the cost units and fixed costs are ignored. Marginal cost and variable production costs are more often used interchangeably. When ever an extra one unit of the output is manufactured, the additional cost incurred for manufacturing that one extra unit will be ultimately variable because the fixed cost remains always constant.

Weygandt, Keiso and Kimmel (2005, p. 265) pointed that fixed manufacturing costs are never considered to be production costs and these are not considered in the inventory valuation as well as in management’s decision making process. Marginal costing is a strategic managerial accounting tool that can be used to disseminate managerial information about costs incurred in the manufacturing and other business operation and relationship between some of the significant elements such as profit, volume, costs and efficiency.

Glautier and Underdown (2001, p. 441), found that the very basic advantage of using marginal costing is that it is an easy success-pathway for the management to make proper decision and achieve business success accordingly. Absorption Costing Absorption or full costing, in contrast, considers all the manufacturing costs including both variable and fixed costs. All manufacturing costs are fully attributed and absorbed to the final output (Jawahar-Lal, 2008, p. 627). direct costs are attributed directly to the cost units and thus they can easily be identified along with the output, whereas manufacturing overheads are attributed to the product and other overheads including administration and selling expenses.

As Williams, Haka and Bettner (2004, p. 923) argued, the use of absorption costing will be very effective when the variable costs such as direct material costs and direct labor costs are directly charged to the product and fixed costs are charged proportionately to different products manufactured during a particular period of time. One of the criticisms that absorption method of costing faces is that it presumes prices as the functions of the costs and thus demand of the product is less considered.

It includes past costs that are relatively less relevant to the current pricing and is therefore relatively less dependable for managerial decision making. Absorption costing may not be an