APC 309 Research Paper (Research Paper Sample)

APC 309
Individual Assignment
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Table of Contents
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Table of Contents  PAGEREF _Toc374028402 \h
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1.0. Critical evaluation of various costing methods  PAGEREF _Toc374028403 \h
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1.1. Marginal Costing  PAGEREF _Toc374028404 \h
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1.1.1. Managerial decision  PAGEREF _Toc374028405 \h
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1.2. Absorption/full costing  PAGEREF _Toc374028406 \h
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1.2.1. Managerial decision  PAGEREF _Toc374028407 \h
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1.3. Activity-Based Costing  PAGEREF _Toc374028408 \h
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1.3.1. Managerial decision  PAGEREF _Toc374028409 \h
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2.0. Standard Costing and Variance analysis  PAGEREF _Toc374028410 \h
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2.1. Standard Costing  PAGEREF _Toc374028411 \h
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2.2 .Variance analysis  PAGEREF _Toc374028412 \h
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2.3. Applicability in organizational context  PAGEREF _Toc374028413 \h
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3.0. Reference List  PAGEREF _Toc374028414 \h
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1.0. Critical evaluation of various costing methods
1.1. Marginal Costing
Marginal/variable costing is an inventory costing method in which all manufacturing costs that are variable are incorporated as costs that are inventoriable (Drury, 2012). This means that all fixed costs of manufacturing are excluded from the total costs. Such costs end up being applied as exclusively costs of the time or period in which they were incurred (Jawahar-Lal, 2009). Further, inventoriable costs can be referred to as the costs of manufacturing a product, and which are considered an asset once they are incurred. When the products are sold, these costs become the ‘costs of goods sold’. Since variable costing essentially considers only the costs of manufacturing an extra unit of a product, it can be looked at as a method that focuses on the behavioral aspects of cost as opposed to the functional characteristics (Drury, 2009).
The emphasis is on distinguishing into variable items or elements, in which the cost per unit of a particular product remains constant with the total cost changing in proportion to the extent of activity, and fixed items in which the total cost is always a constant in all periods no regardless of the level of activity (Horngren, Datar, & Foster, 2011). Information relating to marginal; costing can be very important for short-term decision making, planning and control. It is however widely accepted that this cannot be easily attained with the required level of accuracy and it appears to be a method that oversimplifies the reality (Drury, 2012).
Variable costing is a system that can help in mitigating various deficiencies common with absorption or full costing. It enables accounting professionals to produce supplemental information based on the techniques associated with it. Along with administrative, selling, and general costs, fixed costs of manufacturing are considered period costs (Horngren, Datar, & Foster, 2011). In a number of ways, however, this costing system understates the actual production cost. The big question is therefore how it can aid in decision making. It has to be clear that fixed overhead will be incurred regardless of the level of production. The business has, in the long run, to recover such costs in order to survive. However, on a unit-by-unit basis, it can lead to incorrect conclusions in the analysis of product cost.
1.1.1. Managerial decision
One of the managerial decisions in which the variable costing would be more effective than both absorption costing and activity-based costing is in deciding on the sustainability of products offerings. The system can be important for managers in deciding on which products to market and which to discontinue. Instead of discontinuing a product due to profits that are negligible, managers can use this method to determine the costs of maintaining the production of a unit of the product. For example, if a business offers two products and chooses to discontinue one, the remaining product has to absorb greater overhead expenses. For managers therefore, variable costing will be the better illustrator of the effect, on all costs associated with production, of discontinuing a product or service.
1.2. Absorption/full costing
Absorption costing differs from variable costing in that both the fixed and variable costs of manufacturing are incorporated in the inventoriable costs. In costing products and services, this costing system apportions or allocates a share of all the manufacturing costs, both fixed and variable, costs incurred to each unit of its products (Atrill & McLaney, 2012). By doing so, it is easy to establish whether each product or service is profitable in the long run. Under the generally accepted principles of accounting, full costing is essential but may not be much useful. A segmented costing or reporting system results in a variety of measure for each distinct business units. These include segment margin and controllable margin of contribution. While this is impossible in this costing system it is very possible with variable costing.
Full costing essentially involves the addition of the cost of inventory to the cost of goods sold. This means that the gross profit will be reduced by the total manufacturing costs, whether relating to direct materials, manufacturing overhead (fixed or variable) or direct labor. Administrative, selling, and general costs are considered indirect expenses (Atrill & McLaney, 2012). This system’s rationale is that it leads to a product being measured or accounted at its full or complete cost. The mere fact that some costs such as fixed overhead (manufacturing) are hard to identify as regards a particular output does not mean that they should be disregarded as costs of such output. Though most of the claims in support of this costing method have a high degree of validity, the method suffers significant deficiencies. One of the most striking is that it cannot facilitate in making complete management decisions (Johnston, 2013). The information it generates may not consistently provide the finest signals of the best approach to pricing products, or when deciding on discontinuing, a product and so on.
1.2.1. Managerial decision
One of the management decisions best suited for the application of this costing system is when the company expects that all its products at a particular accounting period will not be completely sold. The company may be in possession of finished/ manufactured goods in inventory. Full costing involves assigning a per unit figure to fixed expenses. This means that every item in inventory carries a value that incorporates part of fixed overhead. The expense is not shown until stock in inventory has actually been sold. The manager can use this costing system as a way of improving business profits for the accounting period. At a time when such managerial decision has to be made, full costing would be more effective than either variable or activity-based costing.
1.3. Activity-Based Costing
Activity-based costing is an approach in which costs are assigned to products or services mainly by way of looking at the resources consumed towards the production of the product (Proctor, 2011). The method is basically an alternative to conventional accounting in which overheads are allocated proportionally to the direct costs of the operation. This is not satisfactory because different activities absorbing the same the same costs (direct) can consume significantly varying levels of overhead. For instance, an industrial robot that is being produced in mass and a custom robot can consume the same amount of materials and labor. A custom robot will however consume more of the company’s engineering time than the industrial robot produced in mass. This engineering time is an overhead.
In the conventional accounting approaches, such differences would not be revealed hence a business that makes large quantities of personalized products while basing its pricing on traditional costing may soon find itself incurring huge losses (Atrill & McLaney, 2012) Additionally, as fresh technologies continue making it easier for companies to personalize products, the significance of apportioning indirect costs with a high level of accuracy increases. Introducing this method of costing is however a complicated and difficult task (Johnson, 2013). All business activities, at the beginning, have to be simplified down into their distinct components. A power company, for example, in the efforts to introduce to introduce activity-based costing may have to break down its sourcing activity into things such as negotiations with suppliers, issuing orders for purchase, updating databases, and so forth.
Large firms on the other hand have to introduce a pilot scheme prior to implementing this system throughout the organization. Essential information needed for activity-based costing may not be available; for the purpose it may have to be specially calculated. Still, this will involve making numerous new measurements (Brierly, Cowton, & Drury, 2006). Often, larger companies hire specialized consultants to assist them in getting a system on the road. Establishing an activity-based costing system is important for enhancing business processes as well as for re-engineering programmes. Activity-based costing is used by many companies in obtaining a well-balanced scorecard.
This approach gained popularity in the 1980s though it a...