Cost Analysis for Decision Making and Control : Marginal Costing versus Absorption Costing

Purpose – Management requires adequate, systematic and useful cost data and reports to manage a business enterprise and to achieve its business objectives. The useful information provided by cost records and reports in cost accounting assist management in making their decisions. Therefore, Management Accounting may be defined as the application of accounting techniques for providing information designed to aid all levels of management in planning and controlling the activities of the business enterprise in decision making. Marginal costing is a costing technique in which only variable manufacturing cost are considered and used while valuing inventories and determining the cost of goods sold. That is, only variable manufacturing costs are considered product cost and are allocated to products manufactured. Absorption cost also known as full costing is a costing technique in which all manufacturing costs, variable and fixed are considered as cost of production and are used in determining the cost of goods manufactured and inventories. All manufacturing costs are fully absorbed in to finished goods. Traditional absorption costing systems have long been subject to criticism. Two long-standing issues have been the choice of appropriate overhead recovery rates and secondly the controversy about the need to allocate overheads at all. During the last two decades the problems of traditional absorption costing and marginal costing were again brought under the spotlight. The paper extends the previous research and literature review that investigate marginal and absorption costing methods whose obviously each have their supporters and arguments both in favor of and against each method