Managerial Accounting Types of Costing

1. Chapter 8
Types of Costing

2. TABLE OF CONTENTS
• Summary
• Understand the concepts of Product Costing
• Understand the concepts of Process Costing
• Understand the concept of Joint and by-product costing
• Understand the concept of Marginal and absorption costing

3. SUMMARY

4. SUMMARY
Product costing is the process of tracking and studying all the various
expenses that are accrued in the production and sale of a product, from
raw materials purchases to expenses associated with transporting the final
product to retail establishments. It is widely regarded as an extremely
important component in evaluating and planning overall business
strategies.
Process costing is used when there is mass production of similar products,
where the costs associated with individual units of output cannot be
differentiated from each other. In other words, the cost of each product
produced is assumed to be the same as the cost of every other product.
Under this concept, costs are accumulated over a fixed period of time,
summarized, and then allocated to all of the units produced during that
period of time on a consistent basis. When products are instead being
manufactured on an individual basis, job costing is used to accumulate
costs and assign the costs to products. When a production process
contains some mass manufacturing and some customized elements, then
a hybrid costing system is used.

5. SUMMARY
Job costing involves the accumulation of the costs of materials, labor,
and overhead for a specific job. This approach is an excellent tool for
tracing specific costs to individual jobs and examining them to see if
the costs can be reduced in later jobs. An alternative use is to see if
any excess costs incurred can be billed to a customer.
Job costing is used to accumulate costs at a small-unit level. For
example, job costing is appropriate for deriving the cost of
constructing a custom machine, designing a software program,
constructing a building, or manufacturing a small batch of products.

6. SUMMARY
• Joint and by product costing are specific costing methods that are
used for the purpose of assigning costs to separate products in cases
where two or more different products are manufactured together in
the same production process – so called joint products OR main and
by product.
• There are two general approaches of joint (common) costs allocation
depending on the type of manufactured products:
• if the products are of the same importance (= joint products) – common
costs are allocated by using a meaningful allocation base
• if the products are NOT of the same importance (= main and by product)
- net realizable value (sales value) of by-product is deducted from the
costs of the joint costs and the difference is used to value the main
product

7. SUMMARY
Marginal costing applies only those costs to inventory that were incurred
when each individual unit was produced, while absorption costing applies all
production costs to all units produced. This results in the following differences
between the two methods:
• Cost application. Only the variable cost is applied to inventory under
marginal costing, while fixed overhead costs are also applied under
absorption costing.
• Profitability. The profitability of each individual sale will appear to be higher
under marginal costing, while profitability will appear to be lower under
absorption costing.
• Measurement. The measurement of profits under marginal costing uses the
contribution margin (which excludes applied overhead), while the gross
margin (which includes applied overhead) is used under absorption costing.

8. UNDERSTAND THE CONCEPTS OF PRODUCT COSTING
Section 1

9. PRODUCT COSTING
• Product costing is not an
absolute term having a
permanent definition. The
definition of product costing
varies with the purpose behind
costing a product.
• A product costing can be simply
defined as the total amount of
costs assigned to a particular
product based on a specific
PURPOSE of the management of
the organization.
• Product
costing varies
with the
purpose
behind
costing a
product.
Product
costing
• The total
amount of
costs
assigned to a
particular
product
Product
costing

10. PRODUCT COSTING

11. PRODUCT COSTING
• Costing is a concept not only
applicable to for-profit
organization, its applicable to all
types of organization which
involves in financial transactions
and need financial viability. The
principles of costing are
applicable whether we are
costing a product, service,
subsidized products by
government or NGOs, etc.
Profit
center
Non-profit
center

12. EXAMPLE OF PRODUCT COSTING UNDER
DIFFERENT PURPOSES
PRICING FOR OPEN MARKET SELLING
• When a company does
everything from scratch and sells
the product by its own. The
activities starting from research
and development for the
product, designing,
manufacturing, marketing,
distribution and even customer
service are undertaken for a
particular product or set of
products.
• For costing of such a product, all
the cost elements mentioned
above should be assigned to the
product.

13. PRODUCTMIXDECISIONSANDRATINGOFCUSTOMERS
• With rise in choices of products
offered to consumers based on
colour, variance in designs, size
etc. every organization has to
deal with many products.
• Product mix has gained a lot of
importance that an efficient mix
can decide the bottom-line of a
company. Right mix can convert
a loss making company into a
profit making one. For
determining the product mix, it is
necessary to have a correct
product costing report to
determine contribution and net
margins of each product. This
can further help in deciding the
priority of product marketing
efforts and rate the customers.
Product mix is
important can
decide the bottom-
line of a company
Correct product
costing determine
contribution and
net margin
Decision of product
marking effort
Rate the customer

14. BUY VS. MAKE DECISION
• At many times, a manufacturing
concern comes across decisions
of buy vs. make where they need
a product as an accessory, or
additional product selling to
same etc. They may trade the
same or manufacture
themselves. Under this situation,
the making decision will mostly
depend on the product costing in
case of making if it is directly
bought from market.
• Product costing here will have
many considerations like
additional capacity
enhancements, size of market,
possibility of capacity utilization,
existing underutilized capacity,
economies of scale etc.
Buy vs. make
Depending the cost
bought from market
Also other consideration
i.e. size market,
economic of scale

15. UNDERSTAND THE CONCEPTS OF PROCESSCOSTING
Section 2

16. PROCESS COSTING
Process costing is a method of operation
costing which is used to ascertain the cost
of production at each process, operation
or stage of manufacture, where processes
are carried in having one or more of the
following features:
• Where the product of one process
becomes the material of another
process or operation
• Where there is simultaneous
production at one or more process of
different products, with or without by
product,
• Where, during one or more processes or
operations of a series, the products or
materials are not distinguishable from
one another, as for instance when
finished products differ finally only in
shape or form’.
Process costing is
operation costing at
each process
Features involved
process become the
material
Simultaneous
production of different
products
Products are not
distinguishable from one
another

17. FEATURES/CHARACTERISTICS OF PROCESS COSTING
• Process Costing Method is applicable
where the output results from a
continuous or repetitive operations
or processes.
• Products are identical and cannot be
segregated.
• It enables the ascertainment of cost
of the product at each process or
stage of manufacture.
• The output consists of products,
which are homogenous.
• Production is carried on in different
stages (each of which is called a
process) having a continuous flow.
Output results
from continuous
process
Product are
identical and
unsegregated
Products are
homogenous

18. FEATURES/CHARACTERISTICS OF PROCESS COSTING
• The input will pass through two or more
processes before it takes the shape of
the output. The output of each process
becomes the input for the next process
until the final product is obtained, with
the last process giving the final product.
• The output of a process except the last
may also be saleable in which case the
process may generate some profit.
• The input of a process except the first
may be capable of being acquired from
the outside sources.
• The output of a process is transferred
to the next process generally at cost to
the process. It may also be transferred
at market price to enable checking
efficiency of operations in comparison
to the market conditions.
• Normal and abnormal losses may arise
in the processes.
Passes two or more
processes before it
takes the shape
Process output before
becoming final product
can be saleable
Input acquired from
outside resources
Normal and abnormal
losses arise

19. APPLICATION OF PROCESS COSTING
• There are number of industries
where Process costing system can
be used except where job, Batch
or Unit Operation Costing is
necessary. The following are
examples of industries where
process costing is applied:
• 1. Where the final product
merges only after two or more
process such as paper -the raw
material, bamboo is made into
pulp; pulp is a made into paper
and then it is finished, glazed etc.
for sale;
• 2. The product of one process
becomes the raw material of
another process or operation e.g.
refined groundnut oil is the
material for making vegetable
ghee
Example of
Process Costing
Paper
production
Refined
groundnut oil

20. APPLICATION OF PROCESS COSTING
• Different products may have a
common prior process e.g. brass
goods will require melting of brass
commonly for all goods. Another
example is petroleum products by the
same refinery.
• Some other industries where Process
Costing is applied are:
• Chemical works ,Textiles, weaving,
spinning , Soap making, Food
product, Box making, Canning factory,
Coke works, Paint, ink and varnishing
etc.
Application
Brass
goods
Chemical
works
Soap
making
Canning
factory

21. ADVANTAGESOFPROCESSCOSTING
The following are the main advantages of
Process Costing:
• 1. It is possible to determine process
costs periodically at short intervals.
Average unit cost can be computed
weekly or even daily.
• 2. It is simple and less expensive to find
out the process costs.
• 3. It is possible to have managerial
control by evaluating the performance
of each process.
• 4. It is easy to allocate the expenses to
processes in order to have accurate
costs.
• 5. It is easy to quote the prices with
standardization of process. Standard
costing can be established easily in
process type of manufacture.
Possible to determine
process costs periodically
Simple and less
expensive
Have managerial
control
Easy to allocate the
expenses
Easy to quote the prices

22. DISADVANTAGESOFPROCESSCOSTING
The following are the main disadvantages
of Process Costing:
1. Cost obtained at the end of the
accounting period are only of historical
value and are not very useful for effective
control.
2. Valuation of work-in-progress is
generally done of estimated basis which
introduces further inaccuracies in total
cost.
3. Where different products arise in the
same process, it is not possible to exactly
ascertain the total cost of the products.
4. If any error occurs while calculating
average costs, it will be carried through all
the processes to the valuation of work in
process and finished goods.
5. The computation of average cost is
more difficult in those cases where more
than one type of product is manufactured
and a division of the cost element is
necessary.
Cost obtained from historical value
Valuation of work-in-progress
is done by estimation basis
Different products arise in
the same process
Errors occurs while calculating
average costs
Computing average cost is difficult

23. FUNDAMENTAL PRINCIPLES OF PROCESS COSTING
The following are the fundamental
principles of process costing:
• 1. Cost of material, wages and
overheads expenses are collected for
each process or operation in a period.
• 2. Adequate records in respect of
output and scrap of each processes or
operation during the period are kept.
• 3. The cost per unit of each process is
obtained by dividing the total cost
incurred during a period by the number
of units produced during that period
after taking into consideration the
losses and amount realized from sale of
scrap.
• 4. The finished product of one process is
transferred as a raw material to the
next process.
Cost of material, wages
and overheads expenses
are collected for each
process
Adequate records of
output and scrap
The cost per unit
calculated by dividing
cost incurred
periodically
Finished product is
transferred as raw
material for next
process

24. TREATMENT OF LOSSES IN PROCESS COSTING
• It is rare that the output of a
process is equal to its input. In
most of the cases, the output of
a process is less than the input.
The difference between the
input and output and output is
called process loss. The process
loss may be in the form of loss in
weight, scrapes or wastes. These
process losses may be classified
into:
• 1) Normal Loss
• 2) Abnormal Loss
Normal
loss
Abnormal
loss

25. NORMAL LOSS
• The fundamental principle of
costing is that the good units
should bear the amount of
normal loss. Normal loss is
anticipated and in a process it is
inevitable. It is included in total
cost of the product due to which
cost per unit is increases. The
cost of normal loss is therefore
not worked out. The number of
units of normal loss is credited to
the Process Account and if they
have some scrap value or
realizable value the amount is
also credited to the process
account. If there is no scrap value
or realizable value, only the units
are credited to the process
account.

26. ABNORMAL LOSS
• If the units lost in the production
process are more than the
normal loss, the difference
between the two is the abnormal
loss. It is excluded from total cost
due to which it does not affect
the cost per unit of the product.
The relevant process of account
is credited and abnormal loss
account is debited with the
abnormal loss valued at full cost
of finished output. The amount
realized from sale of scrap of
abnormal loss units is credited to
the abnormal loss account and
the balance in the abnormal loss
account is transferred to the
Costing Profit and Loss Account.

27. ABNORMAL GAIN
• If the actual production units are
more than the anticipated units after
deducting the normal loss, the
difference between the two is known
as abnormal gain. It is excluded from
total cost due to which it does not
affect the cost per unit of the
product. The valuation of abnormal
gain is done in the same manner like
that of the abnormal loss. The units
and the amount is debited to the
relevant Process Account and
credited to the Abnormal Gain
Account.

28. UNDERSTAND THE CONCEPTS OF JOBORDER COSTING
Section 3

29. JOB COSTING
• Job costing is usually a method of
costing applied in industries,
where the cost of the production
is usually measured by the
number of completed jobs. This
is usually taken as a factor to
measure the feasibility of jobs.
These costs are recorded on a
ledger throughout the whole job
process and are added to the
final balance statement when
preparing for job costs and the
batch statement.

30. JOB COSTING
• Job costing method or system
can be virtually used in any
industry and is used to check
whether if the cost of
production exceeds the
overheads and the price of
the materials, so as to provide
profit for the whole process.

31. JOB COSTING
• Job costing is a technique of
costing where the amount of
work done is in the form of the
number of jobs completed.
• The production is taken with
respect to the customer’s orders
and not as bulk for stocking
purposes.
• Moreover, the cost is not taken
singularly but as a bulk of
objects.
No of job
completed
Production
base on
customer’s
order
Cost taken
as a bulk
objects
Job
costing

32. JOB COSTING
For example:
• Printing 5000 books, assembling
500 cars, delivering 4000
pamphlets and so on.
The elements within job costing
procedure consist of direct costs,
employment costs and material
costs which comprises of prime
costs and also overhead charges
used for the departmental costs
and shipping and handling costs
which also includes costs taken for
stocking and storage.
Direct costs
Employment
costs
Material
costs

33. DOCUMENTSUSEDIN AJOB COSTINGSYSTEM
• Production order or cost order is
a type of work order, authorising
and sanctioning the
manufacturers to produce, the
order given to the customer. This
process initiates the
manufacturing process.
• Cost sheet: For recording
purposes, another type of
document is present called the
cost sheet. The cost sheet and
the works order both can be
combined at the last stage while
establishing the final production
value.
Production
order
Cost sheet
Other
documents

34. DOCUMENTSUSEDIN AJOB COSTINGSYSTEM
• The other documents are
processed and submitted in
between the manufacturing
processes such as materials
order, tool tickets, storage and
stocking documents,
warehousing, and inspection
tickets.
Production
order
Cost sheet
Other
documents

35. OBJECTIVES OF JOB COSTING
• To maintain the development of
each job, by providing a separate
account for each and every
process of the job, so as to
estimate the costs taken, when
transitioning from one process to
the another.
• Helps the management in
estimating the price of a certain
work based on the price of the
previous jobs.
• To identify profitable and non-
profitable jobs and help and
prevent profitless jobs taking
place.
Maintain the
development of each
job
Helps the management
in estimating the price
Identify profitable and
non-profitable jobs

36. OBJECTIVES OF JOB COSTING
• To differentiate departments
from one another on the basis of
the cost taken and the amount of
materials required.
• Provide detailed information of
what is happening in each
department to the customer and
move forward with the plan with
respect to the idea of the
customer. Any sudden changes in
the plan can be accommodated,
if congruent with the final cost
estimation.
• Job costing should be flexible
and scalable enough to
accommodate any kinds of
industrial or commercial jobs
available for cost estimation.
Differentiate departments
from one another on the
basis of the cost taken
Provide detailed
information of what is
happening
Job costing should be
flexible and scalable

37. ADVANTAGES OF JOB COSTING
• Job costing acts as a form of analysis
detailing all the type of costs that are
present throughout the manufacturing
process. This includes the direct costs, the
labour costs, and the overhead charges.
• It acts as a gauge determining the
profitability of the job and helps for the
future customers or companies to decide
whether to take up the job or not. It also
gives us an idea about the feasibility of the
job.
• Job costing prevents duplication of work
because it helps in the estimation of a
similar job. This helps in a company
quoting the price of a job, it can always
depend on the pricing of a previous job as
a reference.
Job costing acts as a form
of analysis
It acts as a gauge
determining the
profitability of the job
Job costing prevents
duplication of work

38. ADVANTAGES OF JOB COSTING
• The efficiency of the manufacturers
can also be taken into observation
while taking account of their job
costing and their associated
expenses.
• Ruination and defective work can be
found out through job costings and it
can be immediately corrected
through certain individuals
responsible for the job.
• Budgetary control comes into action
when taken consideration of the
various overhead charges which are
predetermined for each department.
The efficiency of the
manufacturers
Ruination and
defective work
can be found
Budgetary control
comes into action

39. ADVANTAGES OF JOB COSTING
• Job costing information is used
more for job contacts where the
price of the job depends on the
amount of the work done, rather
than depending on the final fixed
price.
• It evaluates the quality of the work
through various statistical techniques.
• Job costing provides an easy
calculation of cost overheads for
specific needs, and in a precise
manner.
• Job costing enables the supervisors
to keep track of various components
such as money, materials and the
performance of the employees.
Job costing information is
used more for job contacts
It evaluates the quality
of the work
Job costing provides
an easy calculation
Job costing enables the
supervisors to keep track

40. DISADVANTAGES OF JOB COSTING
• Based purely on costs. This method, is
disadvantageous in fixing prices for the
complete process, as the costs are
recorded along each step. Hence it
makes is difficult to prevent unwanted
costs and expenditures occurred in
between the processes.
• It is very expensive because records are
to be made for each and every step of
the order. Starting from the materials
list to the final product statement.
Hence capital is needed to keep such
records properly.
• There is no exact procedure for
estimating the job cost since there are
no specific methods to differentiate
direct and indirect costs occurring in a
process. This method of price
estimation, may not be useful for jobs
which are cost-efficient and fast-paced.
Based purely on
costs
It is very expensive
because records are
to be made for each
and every step
There is no exact
procedure for
estimating the job

41. DISADVANTAGES OF JOB COSTING
• No standard procedure to follow
while estimating. The only thing
that can be followed is the need
for supervision when calculating
costs. So as to prevent any
miscalculations and forgery of
the prices and materials
respectively.
• More and more clerical work is
required to detail about the
measures and quota taken in
each and every step of the
project from the start to the
finish.
• Highly expensive because of the
number of people working for a
single project and unwanted
expenditures may also be
present.
No standard
procedure to
follow while
estimating
More and more
clerical work is
required
Highly expensive
because of the
number of people
working

42. DISADVANTAGES OF JOB COSTING
• No control of costs, since quality
control and price control are usually
done after the estimation of the final
price. That too price control can also be
done under a limit. Only to visible price
variations, there is a chance of hidden
costs that may not be recorded.
• These kinds of jobs are only applicable,
depending on the nature of the market
and not on the nature of the job
assigned. This becomes useless when
the behaviour of the consumer market
doesn’t support such jobs, more and
more expenditure for man, machine and
materials takes place.
• During inflation and recession, such
jobs are useless and comparing such job
costs are fruitless and a waste of time.
Ordering job costs during the time of
inflation is not considered smart.
No control of costs
Only applicable,
depending on the
nature of the
market
During inflation
and recession,
such jobs are
useless

43. DISADVANTAGES OF JOB COSTING
• No form of correction can take place if
the actual profit is less than the
estimated profit. The only thing we can
do while calculating job costs is
preventing loss to both the consumer
and the manufacturer.
• Since overheads are allocated to each
department on a predetermined basis,
there is no strict method to control the
cost of the project using job costing.
• Record keeping is what keeps the
process of job costing alive. If there is
no sufficient record work, then it can
cause a huge downfall to the whole
project and it may lead to a huge loss to
the manufacturer.
• There is no 100% accurate estimation
of the total final cost of a job using job
costing.
No form of
correction can
take place
No strict method
to control the cost
No 100% accurate
estimation of the
total final cost

44. JOINT AND BY-PRODUCT COSTING
Section 4

45. JOINT PRODUCTS
• Joint products are two or more
products separated in the course of
processing, each having a sufficiently
high saleable value to merit
recognition as a main product.
• Joint products include products
produced as a result of the oil-
refining process, for example, petrol
and paraffin.
• Petrol and paraffin have similar sales
values and are therefore equally
important (joint) products.

46. BY-PRODUCTS
• By-products are outputs of some
value produced incidentally in
manufacturing something else (main
products).
• By-products, such as sawdust and
bark, are secondary products from
the timber industry (where timber is
the main or principal product from
the process).
• Sawdust and bark have a relatively
low sales value compared to the
timber which is produced and are
therefore classified as by-products

47. ACCOUNTING TREATMENT FOR JOINT PRODUCTS
• The distinction between joint and by-products is important because the
accounting treatment of joint products and by-products differs.

48. ACCOUNTING TREATMENT FOR JOINT PRODUCTS
• Joint process costs occur before
the split-off point. They are
sometimes called pre-separation
costs or common costs.
• The joint costs need to be
apportioned between the joint
products at the split-off point to
obtain the cost of each of the
products in order to value closing
inventory and cost of sales.
• The basis of apportionment of
joint costs to products is usually
one of the following:
• sales value of production (also
known as market value)
• production units
• net realisable value.

49. ACCOUNTING TREATMENT FOR BY-PRODUCTS
• As by-products have an insignificant
value the accounting treatment is
different.
• The costs incurred in the process are
shared between the joint products
alone. The by-products do not pick up a
share of the costs, like normal loss.
• The sales value of the by-product at the
split-off point is treated as a reduction
in costs instead of an income, again just
the same as normal loss.
• If the by-product has no known value at
the split-off point but does have a value
after further processing, the net income
of the by-product is used to reduce the
costs of the process.
By-products have an
insignificant value the
accounting treatment
The by-products do not
pick up a share of the
costs, like normal loss
Split-off point is
treated as a reduction
in costs instead of an
income
Net income (or net realisable
value) = Final sales value -
Further processing costs

50. MARGINAL AND ABSORPTION COSTING
Section 5

51. MARGINALANDABSORPTIONCOSTING
• Marginal and absorption costing are two
different approaches to dealing with fixed
production overheads and whether or not
they are included in valuing inventory.
• Marginal costing is the accounting system
in which variable costs are charged to cost
units and fixed costs of the period are
written off in full against the aggregate
contribution.
• Note that variable costs are those which
change as output changes - these are
treated under marginal costing as costs of
the product. Fixed costs, in this system, are
treated as costs of the period.
• Marginal costing is also the principal
costing technique used in decision
making. The key reason for this is that the
marginal costing approach allows
management's attention to be focused on
the changes which result from the decision
under consideration.
Marginal and
absorption deal with
fixed production
overheads
Variable costs are
charged to cost units
and fixed costs of the
period are written off
Variable costs are
those which change as
output changes
The principal costing
technique used in
decision making

52. CONTRIBUTION CONCEPT
• The contribution concept lies at the
heart of marginal costing. Contribution
can be calculated as follows.
• Contribution = Sales price - Variable
costs
• The idea of profit is not a particularly
useful one as it depends on how many
units are sold. For this reason, the
contribution concept is frequently
employed by management accountants.
• Contribution gives an idea of how much
'money' there is available to 'contribute'
towards paying for the overheads of the
organisation.
• At varying levels of output and sales,
contribution per unit is constant.
• At varying levels of output and sales,
profit per unit varies.
• Total contribution = Contribution per
unit x Sales volume.
• Profit = Total contribution - Fixed
overheads
Contribution = Sales price -
Variable costs
Total contribution = Contribution
per unit x Sales volume.
Profit = Total contribution - Fixed
overheads

53. MARGINALCOSTINGINCOMESTATEMENT
Valuation of inventory - opening and closing inventory are valued at marginal
(variable) cost under marginal costing.
The fixed costs actually incurred are deducted from contribution earned in order
to determine the profit for the period.

54. ABSORPTION COSTING
• Absorption costing is a method
of building up a full product cost
which adds direct costs and a
proportion of production
overhead costs by means of one
or a number of overhead
absorption rates.
Full direct
cost
Production
overhead
Absorption
costing

55. ABSORPTION COSTING INCOME STATEMENT
Valuation of inventory - opening and closing inventory are valued at full production
cost under absorption costing.
Under/over-absorbed overhead - an adjustment for under or over absorption of
overheads is necessary in absorption costing income statements.

56. THEEFFECTOFABSORPTIONANDMARGINALCOSTINGON
INVENTORYVALUATIONANDPROFITDETERMINATION
• Marginal costing values
inventory at the total variable
production cost of a unit of
product.
• Absorption costing values
inventory at the full production
cost of a unit of product.
• Inventory values will therefore be
different at the beginning and
end of a period under marginal
and absorption costing.
• If inventory values are different,
then this will have an effect on
profits reported in the income
statement in a period. Profits
determined using marginal
costing principles will therefore
be different to those using
absorption costing principles.

57. RECONCILINGPROFITSREPORTEDUNDERTHEDIFFERENTMETHODS
• When inventory levels increase or
decrease during a period then profits
differ under absorption and marginal
costing.
• If inventory levels increase, absorption
costing gives the higher profit.
• This is because fixed overheads held in
closing inventory are carried forward
(thereby reducing cost of sales) to the
next accounting period instead of being
written off in the current accounting
period (as a period cost, as in marginal
costing).
• If inventory levels decrease, marginal
costing gives the higher profit.
• This is because fixed overhead brought
forward in opening inventory is
released, thereby increasing cost of
sales and reducing profits.
• If inventory levels are constant, both
methods give the same profit.

58. THEADVANTAGESAND DISADVANTAGESOF
ABSORPTIONANDMARGINALCOSTING
Advantages of marginal costing Advantages of absorption costing
•Contribution per unit is constant unlike
profit per unit which varies with changes in
sales volumes
•There is no under or over absorption of
overheads (and hence no adjustment is
required in the income statement).
•Fixed costs are a period cost and are
charged in full to the period under
consideration
•Marginal costing is useful in the
decision-making process
•It is simple to operate
•Absorption costing includes an element
of fixed overheads in inventory.
•Analysing under/over absorption of
overheads is a useful exercise in
controlling costs of an organisation
•In small organisations, absorbing
overheads into the costs of products is the
best way of estimating jo

59. THEADVANTAGESAND DISADVANTAGESOF
ABSORPTIONANDMARGINALCOSTING
• The main disadvantages of
marginal costing are that closing
inventory is not valued in
accordance with accounting
standards and that fixed
production overheads are not
'shared' out between units of
production, but written off in full
instead.
• The main disadvantages of
absorption costing are that it is
more complex to operate than
marginal costing and it does not
provide any useful information
for decision making (like marginal
costing does).
Closing inventory is not
valued in accordance with
accounting standards
More complex to operate
than marginal costing