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Absorption Costing - Marginal Costing, Cost Management Video Lecture | Cost Management - B Com
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FAQs on Absorption Costing - Marginal Costing, Cost Management Video Lecture - Cost Management - B Com
| 1. What is absorption costing and how does it differ from marginal costing? |  |
Absorption costing is a costing technique that allocates all manufacturing costs, including both variable and fixed costs, to the units produced. On the other hand, marginal costing only considers variable costs as the cost of production. The main difference is that absorption costing includes fixed manufacturing overheads in the cost of each unit, while marginal costing treats fixed manufacturing overheads as period costs and not part of the cost per unit.
| 2. How does absorption costing help in cost management? | |
Absorption costing provides a more comprehensive view of the cost of production by including both variable and fixed costs. This allows managers to have a better understanding of the total cost per unit and make informed decisions regarding pricing, product mix, and resource allocation. By analyzing the absorption costing data, managers can identify areas of inefficiency, control costs, and improve overall cost management strategies.
| 3. What are the advantages of using marginal costing over absorption costing? | |
One advantage of using marginal costing is that it provides a clearer understanding of the impact of changes in production volume on profitability. Since fixed costs are treated as period costs and not allocated to units produced, marginal costing allows for better decision-making in relation to pricing, sales volume, and cost control. Additionally, marginal costing is relatively easier to understand and apply compared to absorption costing, making it a preferred choice for short-term decision-making.
| 4. Can absorption costing and marginal costing be used together? | |
Yes, absorption costing and marginal costing can be used together. While absorption costing provides a more accurate measure of the total cost per unit, marginal costing provides valuable insights into the contribution margin and the impact of variable costs on profitability. By using both techniques, managers can have a comprehensive understanding of the cost structure and make informed decisions that consider both fixed and variable costs.
| 5. How does absorption costing handle under or over-absorbed overheads? | |
Under or over-absorbed overheads occur when the actual overhead costs incurred differ from the overhead costs allocated to the units produced. In absorption costing, these under or over-absorbed overheads are typically adjusted and accounted for as part of the cost of goods sold. They are written off against the profit and loss account, resulting in either an increase or decrease in the reported profit. This adjustment ensures that the total manufacturing costs are accurately reflected in the financial statements.
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Nov 22, 2024 Last updated |
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