Cost Accounting: A 12 Managerial Emphasis. 12th ed. Prentice Hall. 12 Elliott Taylor, 2011. Full-Costing Income Statement vs. Variable-Costing Income Statement. [online] Available at < http://smallbusiness.chron.com/fullcosting-income-statement-vs-variablecosting-income-statement-20350.html > [Accessed 25 December 2011] 13 Jae Shim, Joe Seigel, 2011. Schaum's Outline of Managerial Accounting. 2nd ed. McGraw-Hill. 13 John Simms, 2008. The Variable Costing Income Statement for External Reporting. VDM Verlag. 13 Noah P. Barsky, Anthony H. Catanach, 2004. Management Accounting: A Business Planning Approach. South-Western College Pub. 14 Steven M. Bragg, 2011. Cost Accounting Fundamentals: Essential Concepts and Examples. 2nd ed. Accounting Tools. 14 Executive Summary Full Costing and Variable Costing are two common approaches to cost keeping employed at the management accounting level in various firms across the globe. Both approaches have their pros and cons and making a choice between the two is solely dependent upon the practices of the firm, its approach to create shareholder value and the mindset of its employees. In terms of the treatment of different types of cost, there is only one difference between the two approaches under consideration. The Manufacturing Overhead component of cost is treated in a different manner under both the approaches. The fixed component of the Manufacturing Overhead is absorbed by the product as it is treated as a product cost in Full Costing approach while the same component is treated as a period cost under the Variable Costing approach. This different treatment of the Fixed Manufacturing Cost, poses a positive effect on the bottom line of the company in the Full Costing Approach, as the cost incurred on the goods not sold is not deducted from the revenues generated during the relevant period. When it comes to Variable Costing, the costs incurred over the manufacturing of all the produced items are deducted from the revenues of the relevant period. This tends to shrink the company bottom-line for the immediate period. These two approaches thus influence the mindset of the shareholders and stakeholders of the company. The type of approach to costing adopted by the company shall also depend on the industry that it operates in and the shareholder anticipations as well. Introduction The ultimate objective of the commencement of any business is to generate profits. A simple equation that generates the bottom line of any business entails the deduction of costs from revenues of the company. Revenue calculation is not a Herculean task, and thus there are not a lot of distinguished approaches that can be used to calculate the revenue of the company. However costing is a much more complex and complicated component of the formerly mentioned equation. There are various approaches utilized by management accountants and financial analysts across the globe for the computation of the cost components. Each component has its own justification and rationale and this paper will be specifically aimed at discussing two of the most utilized approaches to costing namely Full Costing and Variable Costing (Garrison, Noreen, Brewer, 2009). Main Findings In general, no matter whichever approach to accounting is used by the accountants for the treatment of the cost factors in the financial
Full Costing and Variable Costing Customer Instructor Date Contents Full Costing and Variable Costing 1 Customer name 1 Course 1 Instructor 1 Date 1 Contents 2 Executive Summary 3 Main Findings 4 Direct Costs 5 Indirect Costs 6 Full Costing 6 Variable Costing 7 Summary of Full Costing and Variable Costing Components 8 Making a choice between the two 9 Conclusion and Recommendations 10 References 12 Accounting for Management, 2011…
11 Conclusion 12 References 12 Introduction In today’s complex business environment, the management not only requires day-to-day and accurate information about the costs incurred in the business functioning, but also needs to understand which specific costing method will be more suitable to the financial system it follows.
Banham (2000) discussed that strongly bonded supply chain members result in cost controls and hence, results in overall combined cost savings. For major portion of the product cost, which accounts for almost 70 to 80% of the total cost as mentioned in the study of Cooper and Chew (1996), employing target costing enables business to take cost benefit from various aspects identified in the initial stage of designing.
The total variable cost normally changes as the activity level changes, while per unit, the variable cost per unit will normally remain the equal over a wider range of activity. Fixed cost will always remain the same when the activity level changes while fixed cost per unit decreases with an increase in the activity level (Hansen, et, al 2006) Mixed cost, have both the component of variable and fixed costs.
The expense for a future benefit that lasts simply during the present phase is a cost that is expensed. For instance, the cost of office provisions used in the present fiscal period is classified as an expense because it does not have benefits that carry over to future fiscal periods.
Two major costing approaches have been developed for ensuring the accurate measurement of costs of products in organizations operating in different industrial sectors: the full costing, also known as absorption costing, and the variable costing. Both these approaches
Variable-Costing Income Statement. [online] Available at < http://smallbusiness.chron.com/fullcosting-income-statement-vs-variablecosting-income-statement-20350.html > [Accessed 25 December 2011] 13
Full Costing and Variable Costing are two common approaches
Also implications of these approaches in the real world along with the use of variable and full costing approach in product and service organisations has also been discussed. In the end, the report provides
The companies believe that the sales volume does not matter in case of earning profitability, what matters is the cost effectiveness, i.e. to keep the costs as low as possible. The decision regarding finance in an organisation virtually
The absorption costing technique is more favourable as the profits estimated under this system are more accurate. Variable costing is seen to inflate expenses and reduce the level of profits. Both the methods
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