Question

“The choice between absorption costing and marginal costing is determined by certain factors”.

What are they?​

Answer 1

Answer:

Calculation – marginal costing is based on variable costs but excludes fixed costs and absorption costing includes both direct and indirect cost. Generally if a cost is variable it is also direct, therefore, the addition of fixed overheads to the marginal cost will give the full absorption cost.

Explanation:

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Answer 2

Marginal price is the cost of 1 further unit of output.

• The idea is employed to work out the optimum production amount for a company, wherever it costs the smallest amount to supply additional units.
• it's calculated by dividing the amendment in producing costs by the change within the quantity produced.

Absorption cost accounting may be a methodology for accumulating the prices related to a production method associated with apportionment them to individual products.

• this sort of costing is needed by the accounting standards to make a list valuation that's declared in an organization's balance sheet.

Examination of Marginal cost accounting and Absorption cost accounting

• The subsequent variations exist between the 2 methods:

price application.

• solely the variable cost is applied to inventory below marginal costing,
• whereas mounted overhead prices also are applied under absorption costing.

Profitability.

• The profit of every individual sale can seem to be higher under marginal costing, while profitability will appear to be lower under absorption costing.

Measurement.

• The measure of profits under marginal costing uses the contribution margin (which excludes applied overhead),
• while the profit margin (which includes applied overhead) is employed under absorption costing.

Overhead prices are charged to expenses within the amount below marginal cost accounting,

• whereas they're applied to products under the absorption costing methodology (which might defer expense recognition to a later period).
• an extra distinction is that absorption costing is needed by the applicable accounting
• frameworks for monetary reportage purposes, so that plant overhead is going to be enclosed in the inventory asset.
• Marginal costing isn't allowed for financial reporting purposes, thus its use is restricted to internal management reports.

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