Three Branches Of Accounting, Cost And Variance

1703 words - 7 pages

Knowingly, there are two main branches of accounting namely, financial and cost; however the usage of these accounting methods has taken new routes in the recent era. In the past both were used to merely calculate profit and loss and calculating manufacturing cost. But the recent era has changed the dimensions dramatically and today both branches have interacted to form managerial accounting, which along with financial and costing information helps companies for management decision making. Traditionally the very two costing methods of management accounting counts on Marginal and absorption costing and the advancement has intrigued the scholars to develop a relatively new method of costing “Activity Based Costing”. The report coming forth elaborates over all three named methods as well as it presents an essay about the acceptability of the standard costing and variance analysis at current, its challenges, and the choice of approval for use in the future.
Variable (Marginal Costing)
Anyone with economic background is well aware of the term “marginal” which defines as extra, thus the economic definition of the term implies cost of producing any extra unit of a product; however the accounting meaning differs stating variable costing as the incurrence of cost on manufacturing other than fixed costs. Meaning thereby, that it accounts for the direct labor cost used in producing a product and the fixed cost of production is deducted at the later stage as indirect expenses/cost. The question comes of “Why” to use this particular method? Evidently speaking, if this method is preferred, there are certain underlying benefits. The prime noted and argued benefit is said to be its attempt to differentiate between fixed and variable costs, as fixed cost is more dispersed to all activities and the variable cost is more significant and specific to the production activities and are therefore considered mainly under this method. The firms applying marginal costing to their production system are mincingly aware of the cost trends and it is helpful to match with selling price trends. For instance in case of increasing inflation the firm can establish an understanding of relevant differences to adjust the prices against inflation. Internally, it alarms the company about the menace of excessive variable costs to help company to consider its early remedies. For any business, it needs to determine the minimum production level to cover its fixed cost (breakeven) and marginal costing in this regard is effective and provides the breakeven production. The literature provides that this method is perceived to be the most easy to apply and is extensively used by the manufacturing organizations. Although it serves significant advantages to the organization, on the contrary the method is primarily criticized for being ineffective in long run. Since, fixed costs in the long run is actually not fixed and tends to change with change in factors of production; therefore the scholars...

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