Question

This passge require analysis and breakdown

Nawaz (2013) discusses the differences between absorption costing and marginal costing and attempts to assist others in understanding when each method would play a beneficial role in management accounting. A brief history of how marginal costing evolved is given along with showing how keeping secret knowledge slows the process of developing systems, as was the case with marginal costing. Nawaz (2013) then defines key terms used for cost accounting: fixed versus variable costs and product versus period costs. A brief explanation of the base differences between absorption costing and marginal costing is given: absorption costing taking all fixed and variable costs that are assigned to production as a product cost, leaving only selling and administrative costs as period costs, and marginal costing taking only variable production costs as a product cost, leaving fixed production overhead costs plus selling and administrative costs as period costs. Nawaz (2013) then breaks down the stated advantages and disadvantages of each method based on past research. After laying a solid foundation for understanding both absorption costing and marginal costing, Nawaz (2013) the gets to the heart of the debate by discussing the question of whether the fixed overhead costs should be considered a product or period cost, which is shown to question whether profit is a function of only the sales process or a function of both sales and production. Absorption costing advocates argue that profits are driven by products, therefore the total production costs should be included as an inventoriable asset and expensed only when the product is sold alongside the sales costs and were incurred to generate the revenue. Marginal costing advocates argue that profits are driven by sales because only when a product is sold is there any revenue generated. Each method is shown to have validity under certain situations for purposes of analysis. When inventory production is steady, absorption costing can provide a clearer overall picture of the total costs that are required to produce a product; however, when the production of inventory fluctuates, it creates inflated or deflated prices. Nawaz (2013) concludes for the reason that most inventory levels fluctuate, marginal costing is more suitable to decision-making and helping others understand the worth of the organization.

The overall analysis given by Nawaz (2013) of both of these common accounting methods helped to clarify the base that is causing the differences, the treatment of fixed overhead costs as either period costs or product costs. Understanding that the variance from the 2 methods comes from the decision of what drives profits helps to better understand the discussions and debates that surround absorption costing and marginal costing. If you believe that the product you are producing is an item that can basically sell itself, without the need for a large sales push, then likely you will favor absorption costing that places total costs from the business onto the shoulders of the inventory you are producing to sell. If however, you believe that no product can sell itself and it takes creation of a market demand for the product, then likely you will favor marginal costing since it only applies variable costs that are directly related to the product to the product in inventory and the remainder of the costs is treated like your sales costs and is a period cost that you would incur regardless of the product that was produced. When you think about the costs from a profit perspective it opens the possibilities for understanding and relating to the costs in a whole new way.

Answer 1

Absorption costing and marginal costing plays a beneficial role in management accounting. The difference between absorption costing and marginal costing as far as costs are concerned can be explained as:

Absorption costing takes into account all fixed and variable costs that are assigned to production as a product cost, and ignoring selling and administrative costs as period costs. While on the other hand, marginal costing takes only variable production costs as a product cost, except fixed production overhead costs and selling and administrative costs as period costs.

There was an argument related to both absorption costing and marginal costing, that raised a situation of debate by discussing the question of whether the fixed overhead costs should be considered a product or period cost, and whether profit is a function of only the sales process or a function of both sales and production. In this argument, Absorption costing advocates argue that profits are driven by-products, therefore the total production costs should be included as an asset that can be stored and expensed only when the product is sold alongside the sales costs and were incurred to generate the revenue. On the other hand Marginal costing advocates argue that profits are driven by sales because when a product is sold only then the revenue is generated.

Each method has shown to have validity under certain situations for purposes of analysis. When inventory production is steady, absorption costing can provide a clearer overall picture of the total costs that are required to produce a product. However, when the production of inventory fluctuates, it creates inflated or deflated prices.

This concludes that most inventory levels fluctuate, hence marginal costing is more suitable to decision-making and helping others understand the worth of the organization.

If one believe that the product is an item that can basically sell itself, without the need for a large sales push, then one must favor absorption costing that places total costs from the business onto the shoulders of the inventory. However, if one believe that no product can sell itself and it requirres a creation of market demand for the product, then one will favor marginal costing since it only applies variable costs that are directly related to the product to the product in inventory. The remainder of the costs can be treated like the sales costs and is a period cost that one would incur regardless of the product that was produced.