business

Topics: Variable cost, Marginal cost, Costs Pages: 2 (440 words) Published: January 31, 2014
Marginal costing and contribution
A principle whereby variable costs are charged to cost units and the fixed costs attributable to the relevant period is written off in full against the contribution for that period. For contribution, is the difference between sales value and the variable cost of those sales, expressed either in absolute terms or as a contribution per unit (The Association of Business `Executive, 2009). It is assumed that M&S used marginal costing evidence in their financial statement. The proportion variable cost in the cost of sales figure is relatively high. Critics argued in marginal costing fixed overheads are not charged to the cost of production, due to this effect of varying charges per unit is avoided. It also helps to short-term profit planning by break-even chart and profit graphs. Comparative profitability can be easily assessed and brought to the notice of the management for decision-making.

Absorption costing:
It is the process of costing product whereby all fixed and variable costs are allocated to cost centres where they are accounted for using absorption rates. It is also called full absorption costing where all incurred costs are recuperated from selling price of the products or services. Absorption cost includes three stages: i. Cost allocation

ii. Cost apportionment
iii. Cost absorption

Cost allocation: The method of determining the cost of the services, which is provided to the users of that a service, is known as cost allocation. It only determines what the service costs to provide but not the price of the service.

Cost apportionment: It divides the costs between the cost centres in accordance to the quantity of the costs, which is seen as being reasonable.

Cost Absorption: The charging of operating cost to the cost units with the help of the rates that is calculated separately for every cost centre. The operating cost may be absorbed into cost of the product in a various ways, but the two standard...
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