BSc Accounting Programme -- Management Accounting -- Absorption vs Essay

BSc Accounting Programme -- Management Accounting -- Absorption vs Marginal Costing - Essay Example more value at lower cost.† In absorption costing apart from the direct costs which are allocated to the cost centers and the units produced, indirect costs are apportioned to the cost centers and the units produced on equitable basis. In the marginal costing system, the fixed and variable costs are segregated for ascertaining the effect of changes in volume on profit. The marginal cost will be very useful in taking management decisions. There are advantages as well as disadvantages in both the types of costing techniques. But, it is important to note that a good cost accounting system will be useful in identifying the unprofitable activities in an organization and inefficiencies in the system in any form. Variance analysis made by using cost accounting will be useful in highlighting the deviations from the planned performance for taking suitable management action. Absorption costing or marginal costing is used depending upon the purpose of the management activities. Wherever material, labor and expenses could be identified with the cost centers they are directly allocated to them. Indirect materials, labor and expenses which could not be directly allocated to the cost centers are apportioned to the cost centers on equitable basis. â€Å"Full absorption costing is a costing method that accounts for all costs to the units produced by the activities of an organization through cost drivers.† (Galang-Manalo & Valenzuela-Manalo, 2011, 1.8.4) Materials, labor and expenses which do not form part of the finished products are known as indirect material, labor or expenses as the case may be. These are collectively called as overheads. The overheads are subdivided into production overheads, administration overheads, selling overheads and distribution overheads. Cost apportionment involves apportionment of the indirect costs to various cost centers on an equitable basis. For example, Works Managers salary needs to be apportioned to various departments such as