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Full costing versus variable costing: Does the choice still matter - Essay Example

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Expenses in regard to the various phases of organizational processes may be differentiated under the influence of market turbulences and the organization’s internal…
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Full costing versus variable costing: Does the choice still matter
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Download file to see previous pages are based on different criteria for evaluating the cost of products, as derived from all organizational activities, which are involved in the production process. In accordance with Larkin and DiTomasso (2010) cost can be described as ‘the sum of expenditures and charges required for bringing an article to its existing condition and location’ (Larkin and DiTomasso 2010, p.297). The aspects of full and variable costing, as developed in organizations worldwide, are described in this paper. Reference is made to the characteristics of the two approaches but also to their advantages and disadvantages as elements of the organizational planning. The examination of the above approaches led to the assumption that both full and variable costing are important for understanding the priorities of each organization in terms of the funding of its operation. However, under certain terms, full costing may be more effective in understanding an organization’s actual weaknesses in expanding its operations. Since the requirements of full costing are increased, compared to variable costing, the full costing is more likely to reveal any gap in regard to the financial status of a particular organization. It is for this reason that full costing has remained the key costing approach in external reporting whereas variable costing mainly serves organizations internal reporting needs.
In order to understand the framework of full costing, as differentiated from that of variable costing, it would be necessary to refer primarily to the definition of these two approaches, as developed in the literature. In accordance with Kinney and Raiborn (2008) the full costing, also known as absorption costing, ‘treats the costs of all manufacturing components as product costs’ (Kinney and Raiborn 2008, p.73). On the other hand, variable costing ‘includes only direct material, direct labour and variable overhead as product costs’ (Kinney and Raiborn 2008, p.73). In accordance with the definition ...Download file to see next pagesRead More
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