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Variable costing - Assignment Example

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Variable costing

Despite the various methods of pricing a firm based on its industry should select the most effective method to the firm. Costing is the main function in every firm, the rational being every firm exists in its industry with the main aim as profit making. References 8 VARIABLE COSTING Executive summary This is a report about a review of marginal costing as used in the managerial accounting system. Certain terminologies associated with the concept of marginal costing are identified in the report. The report also defines logically certain terms like variable costs, fixed costs, CVP and breakeven analysis as the key concepts. It goes ahead to prove the rational and marginal costing concepts as used in short term decision making. Being a costing technique, several assumptions such as division of cost element into fixed costs and variable costs, variable cost being considered directly proportional to the production volume, fixed costs being constant throughout the production levels and is being shared according to the volume of production per unit, cost is only influenced by the volume output, and at all levels, the selling price would remain unchanged, are associated with it. The report analysis gives logical evidences in manufacturing, hospitality and airline industries, as where the technique is used. Through appraisal and evaluation, it has been found to be the basis for product and service costing; hence, it is critical to identify its strengths and weaknesses (Maher, Lanen & Rehan, 2005). A recommendation has been made in this report for the marginal costing to be used in the three industries for a short term after its comparison with other alternative methods. Reconciliation of absorption and marginal costing methods has been recommended in order to cater for both short term and long term decisions. In summary, every firm is advised to use a costing method which is relevant to the firm’s decision. Introduction Variable costing is a managerial accounting concept, which according to Managerial Accounting by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer, is a costing method which has only a variable cost in the unit product cost. From its definition, Variable costs are the costs that vary with corresponding changes in the level of production. Thus, we can say variable costs are directly proportional to the volume of production. The technique is majorly for short term decision making instances rather than for outside purposes. Other methods of costing may include manufacturing cost that does not consider differentiating the costs into either fixed or variable costs (Drucker, 1999). In manufacturing cost, we consider the direct materials, direct labor and manufacturing overhead. Under this managerial accounting concept, a logical relationship between direct materials inventory and the expenses (direct labor and manufacturing overhead) incurred in the production of the end product which is delivered to the market for sale. In this case, the inventory does not fully absorb the firm’s costs. The method considers cost of goods sold to be made solely as a variable cost because it does not include fixed manufacturing overhead from the cost of inventory. Since fixed inventory is always expensed in the current period, it is normally treated as a periodic cost as the capitalizing cost which forms part of the inventory cost is often referred to as product cost (Maskell & Bargerly, 2003). When marginal costing is used to mean the cost of goods which only includes variable in its unit product cost, then variable costing may also be linked to this meaning. Variable costing ...Show more


Costing is one of the managerial accounting functions which needs a careful selection and evaluation of the effectiveness of every technique.Despite the various methods of pricing a firm based on its industry should select the most effective method to the firm…
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