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Accounting - Essay Example

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Marginal costing, also known as contribution, variable and direct costing, refers to the method of cost accounting whereby marginal costs are the ones charged to cost units and the fixed costs are the ones treated as a lump sum. Refers to the method where only variable costs are…
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Download file to see previous pages First, there are numerous advantages of using marginal costing over absorption costing. It is easier to carry out the control and determination of production costs. This is through the management avoiding the arbitrary allocation of the fixed overhead costs thus having an achievement and maintenance of a uniform and marginal cost that is consistent (BANERJEE, 2006).
Second, marginal costing helps in planning for short-term profit. This is through the easy demonstrations using the break-even charts and profit graphs. Unlike the absorption costing, comparative profitability can easily be assessed and hence be brought to the notice of the management so that there is decision making (Avis, 2009).
Third, with the implementation of marginal costing, there is ready appreciation and assessment of the effects of the production policies and alternative sales. This ensures that there will be maximum yield to the business due to the decisions arrived. This gives it a notch higher than in using absorption costing (V., 2010).
The method eliminates any large balances that are left in the overhead control accounts. This thus indicates that there is a difficulty in ascertaining the accurate recovery rate of overheads. With the elimination, it becomes easier to determine the accurate overhead rate of recovery (Drury, 2007).
On the other hand, there are the disadvantages of using marginal costing over the absorption costing technique. First, there is difficulty in separating costs into the fixed and variable costs. This is because, in the long run, all costs are variable. Such classification may sometimes lead to misleading results to the cyber firm (Hill, 2012).
Second, under the marginal costing, stocks and the work in progress are usually understated. The exclusion of fixed costs, especially from the inventory, affects the profit. With this, the true and fair view of the ...Download file to see next pagesRead More
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