Categories >> Business Management >> Finance

Que
stion What are accounting Principles?
Business
Administr Question Submitted By :: Nandu
ation I also faced this Question!! R
Interview Answer
a
Question Posted
n
s By
k

Marketin Re: What are accounting Principles?

g Sales
Interview Ans Maintaining the Basic 2 Karthik
Question wer Accounting Books, ex.
Daybook, bank
s #1
book, purchase sales
account and vouchers.
regular invertory
Finance process
Interview
Question 42
s 4
Is This
Ye
Answer
s 535 No
Correct ?
Human
Resource
s
Interview
Question Re: What are accounting Principles?
s
Ans there are 3 types of 4 Sirisha
wer accounting principals
# 2 1. personnel accoumt:-
Personne debit the receiver and
l credit the
giver,
Manage
2. real account:- debit
ment what comes in and
Interview credit what goes
Question out.
s 3. nominal account:-

Hotel
Manage
Interview
Question
s

Industrial
Manage
ment
Interview Other Finance Interview Questions
Question
s
Asked Answe
Question
@ rs
Infrastruc
ture
Manage To maintain the secrecy of the
ment affairs of a customer is obligatory
Interview
on the part of the bank, but NBP 2
Question
sometime it may not be
s considered essential. Discuss.
what is the meaning of portfolio
IT
management? what comes under SMC 9
Manage
portfolio management
ment
Interview
impact of sub prime mortgage
Question
crises to indian economy and in
1
s particular reference to banking
industry
Non
Hi My name is Jay, I am 2007 1
Technical
batch passout engineering
Interview
student.I have been working in a
Question
very good software
s
organisation(CMM level 5) since
last one year. One month before I
have taken an admission to
Business
PGDBA in FINANCE(Post
Manage
Graduation Diploma in Business
ment
Administration) in Welingkar
AllOther
Institute, Mumbai.Course duration
Interview
is of 2 year. I want to know
Question
s
specifically that how exactly this
new degree will b benificial for
my carier growth. Can I change
my line of job from s/w to Finance
? How exactly shall I proceed so
as to get the optimum benifit of
PGDBA degree?
Capital-
what is called re-capitalization 4
IQ
Case- XYZ ltd an IT company is
not an MNC based in the USA.
ABC ltd an IT company is an MNC
based in Germany. The Germany
company wants takeover the USA
company.When the ABC ltd scans
XYZ ltd company's financial
statements it shows profit (no
HSBC 10
fraud or infringement was made
in accounts of XYZ ltd).But the
finance department of ABC ltd
says the XYZ ltd financial
statements show various losses.
Question- Cite four reasons why
XYZ ltd shows loss, while it has
made profit?
am about to enroll for Oracle 1
Apps Financial with Iapps in pune,
(without the certification of
Oracle, as it is very expensive).
Looking for a suggestion on the
same, Also, how far is this course
wld be beneficial to a candidate
of commerce background (BBA
graduate and an MBA in Finance)
Also, the opportunities lying
ahead int his field. Thanks
What is Investment? 22
nikkie stock exchange belongs to
Religare 6
which country
what is the maximum number of
directors in public limited 7
company
why is forex market and gold
1
market are in inverse action?
hi,i am mba finance student in 3
Nagarjun
rd sem.how to i prepare for
a-
interview,i m intersted to banking 4
Fertilizer
sector.so which post i will get in
s
campus selaction.
What is ROI? 8
Types of ratios? wht r they Deloitte 14
what is the difference between
savings bank account and current 7
bankink account?
what is E.T.F. Give the name of
JPMorga
any company who is famous for 2
n-Chase
this type of service.
What is Dividend Yield Ratio? UBS 4
What is the difference between ABN-
9
debt and equity? AMRO
is there any course conducted for
nse intra trading and what are
the basic technical analyis for 1
nifty?i alos want to know how to
learn the charts in nse?
differetiate capital reserve and 1
 reserve capital

For more Finance Interview Questions Click

Here

Copyright Policy | Terms of Service | Help | Site

Map 1 | Articles | Site Map | Site Map |

Contact Us |

Copyright © 2009 ALLInterview.com. All Rights

Reserved.

ALLInterview.com :: Forum9.com ::
KalAajKal.com

throughput costing

Hide links within definitionsShow links within definitions

Definition

Method of costing a product where only the unit-level direct

costs are assigned to the product.
THROUGHPUT COSTING
Throughput costing treats all costs as period expenses except for direct
materials. It is also called super-variable costing. It is very suitable for
those companies where labor and overheads are fixed costs. Assembly-
line and continuous processes that are highly automated are most likely
to meet this criterion. In such company, workers are usually well-
educated engineers or technicians employeed on permanent basis.
Main features are:
• It helps incremental analysis for meeting special orders when there
is an excess capacity. An airline can take passengers much below
the normal fare when it observes that some seats are empty for want
of booking or cancellation or no-show passengers.
• It is a dynamic, integrated, principle-based approach.
• It provide managers with decision support information for
optimization of resources.

SUMMARY
Absorption, variable and throughput costing are alternative product-
costing methods. The difference is treatment of certain cost elements.
Under absorption or full cost method, all manufacturing costs are treated
as product costs. In financial accounting, this method is used in
inventory valuation and is acceptable to tax authorities.In fact all annual
accounts are prepared on this basis to facilitate inter-company
comparison or calculation of industrial ratios.
Variable costing covers only variable costs while all fixed costs are
treated as period costs. This type is more suitable for operational
decisions as fixed cost, being committed, is irrelevant for most decisions.
In present high tech, environment, direct labour has disappeared.
Generally, a few engineers operate the plant. Hence, the only
throughput costs (raw material costs) vary with the change in production.
This would reduce the incentive to over produce to cut down cost per
unit.
 The only common feature among the various methods is the focus or
stress on providing information for decision-making. Since some
techniques are used only internally, the company image or standing is
not affected which is certainly reflected by annual reports prepared after
taking into account industrial norms and GAAP.
VOTE UPVOTE DOWNSHAREPRINTFLAG
Was this Hub ...?
• Useful
• Funny
• Awesome
• Beautiful
MANAGERIAL ACCOUNTING: Managerial Accounting - Basic Cost
Concepts
MANAGERIAL ACCOUNTING: Managerial Accounting - Cost
Volume Profit Analysis
Top of Form
Managerial-Acco

Bottom of Form
close
Sign in to share this Hub
If you are already a member, you can sign in
Top of Form

Username

Email

Password

Retype

I read and understood HubPages' terms of use.

Bottom of Form
If you are not a member, you can sign up
 Top of Form

Username/ email

Password

Remember me
Forgot username or password?
Bottom of Form
Comments

Trsmd 9 months ago

what's the difference between CIMA & ICWA ?

hafeezrm 9 months ago

Thanks for your query. CIMA & ICWA are professional bodies in different
countries but for the same purpose i.e. professional development for
cost and management accountants. The acronyms stand for:

CIMA - Chartered Institute of Management Accountants

ICWA - Institute of Cost and Works Accountants ( of India)

ICMAP - Institute of Cost & Management Accountsnt of Pakistan.

creativeone59 9 months ago

Thanks for a very informative hub. Godpeed. creativeone59
Rufi Shahzada 9 months ago

Dear Sir,

Costings are defined so well... Thanks for adding and refreshing

knowledge constantly.

I want to ask you one thing that if I want to opt between the two CIMA or
ICMA. What should I select ?

RUFI SHAHZADA

hafeezrm 9 months ago

You mean CIMA and ICMAP? Well while CIMA is much better, ICMAP is
much less costly, being in your own home town. On the basis
cost:benefit analysis, I would advise you to complete ICMAP and then
go for a 'fast track' route into CIMA’s strategic level examinations,
leading to CIMA membership.

hafeezrm 9 months ago

Thanks Creativeone59 for your constant encouragement.

Rufi Shahzada 9 months ago

Yes Sir!
Thanks a lot for your guidance. Truly you are a great source of help.
Regards,
RUFI SHAHZADA
Accounting firm 6 months ago

More good informations thanks for helping me out. Always a pleasure to

see information that is useful, thanks again

http://www.kpmgaccountingfirm.info
Athar 5 months ago
Sir,What about IMA-USA CMA Program. Is it better than CIMA /ICMAP
CMA?

hafeezrm 5 months ago

Dear Athar,

I have no idea about IMA-USA. I am MBA myself. I have found an

interesting disussion which may be of interest to you. Please go to the
following link:

http://www.facebook.com/topic.php?uid=2327702058&t
Luisa 7 weeks ago
Dear Sir,
I am very impressed by your deep knowledge and your ability to explain
these tricky issues.
Could you please explain more about the advantages of variable costing
system?
Thank you in advance for your assistance!
Kind regards
Top of Form
Submit a Comment
5073943

Members and Guests

Sign in or sign up and post using a hubpages account.
Name:

URL: optional
Comment:

Post Comment

• No HTML is allowed in comments, but URLs will be hyperlinked

• Comments are not for promoting your hubs or other sites
Bottom of Form

88

hafeezrm
From Karachi, Pakistan
257 Followers
88 Hubs
Joined 18 months ago

Read more hubs by hafeezrm

Follow hafeezrm
Subscribe to hafeezrm's RSS feed

ASK A QUESTION
Ask hafeezrm to publish a Hub answering your question.

ask!

close
Sign up to submit your question ""
If you are already a member, you can sign in
Top of Form
ask:sidebar:lightb

Username

Email

Password

Retype

I read and understood HubPages' terms of use.

Bottom of Form
If you are not a member, you can sign up
Top of Form

Username/ email
 Password

Remember me
Forgot username or password?
Bottom of Form
RELATED HUBS

•
Analysis of Financial Statements – Income Statement
by hafeezrm

•
Analysis of profitability
by hafeezrm

•
Managerial Accounting - Investment Centers & Transfer...
by hafeezrm

•
Managerial Accounting - Cost Volume Profit Analysis
by hafeezrm

•
Managerial Accounting - Job Costing
by hafeezrm
•
Managerial Accounting - An Overview
by hafeezrm
HOME SCHOOLING AND LIFE EXPERIENCE
EDUCATION FORUM

TOPIC REPLIES

What is the best 48

decision you've
made in your
lifeposted by finsofts

How to memorize 15
anything within a
short periodposted
by Narain.K.D.

Someone once said 33

"Know Thyself". Is
This Important:
What Does it
Meanposted by
AdsenseStrategies
financial structure

Rate:

News containing the term 'throughput costing'

This content can be found on the following page:

http://www.businessdictionary.com/definition/throughput-
costing.html
Top of Form

Submit

Search for another term

Bottom of Form

Enter your email address to get our free Term of the Day
newsletter!

Top of Form

termpages

Privacy Policy

Bottom of Form
Tools

Copy and paste this HTML in your website to link to this page
<a href="http://w w w .businessdictionary.com/de

Close

Thanks for your feedback.

Top of Form

Select language...
powered by

Please select a language.

Bottom of Form
throughput costing is...

... in the subjects

Accounting & Auditing
Industries, Manufacturing, & Technology

Nearby Terms

through passenger
through rate
throughput
throughput agreement
throughput contract
throughput costing
throughput time
throwaway
thumbnail image
tick
ticker symbol

Popular 'Accounting & Auditing' Terms

accounting
payment terms
financial management
accounting concepts
letter of credit (L/C)
marginal benefit
asset
revenue
fixed cost
pro forma invoice

Search volume for throughput costing

Throughput Accounting (TA) is a dynamic, integrated, principle-based, and

comprehensive management accounting approach that provides managers with
decision support information for enterprise optimization. TA is a relatively new
management accounting approach based largely on the identification of factors
that limit an organization from reaching its goal and is proposed by Eliyahu M.
Goldratt [1] as an alternative to cost accounting. As such, Throughput
Accounting[2] is neither cost accounting nor costing because it is cash focused
and does not allocate all costs (variable and fixed expenses, including
overheads) to products and services sold or provided by an enterprise.
Considering the laws of variation, only costs that vary totally with units of
output (see definition of T below for TVC) e.g. raw materials, are allocated to
products and services which are deducted from sales to determine Throughput.
Throughput Accounting is a management accounting technique used as the
performance measures in the Theory of Constraints (TOC)[3] . It is the business
intelligence used for maximizing profits, however, unlike cost accounting that
primarily focuses on 'cutting costs' and reducing expenses to make a profit,
Throughput Accounting primarily focuses on generating more throughput.
Conceptually, Throughput Accounting seeks to increase the velocity or speed at
which throughput (see definition of T below) is generated by products and
services with respect to an organization's constraint, whether the constraint is
internal or external to the organization. Throughput Accounting is the only
management accounting methodology that considers constraints as factors
limiting the performance of organizations.
Management accounting is an organization's internal set of techniques and
methods used to maximize shareholder wealth. Throughput Accounting is thus
part of the management accountants' toolkit, ensuring efficiency where it
matters as well as the overall effectiveness of the whole organization. It is an
internal reporting tool. Outside or external parties to a business depend on
accounting reports prepared by financial (public) accountants who apply
Generally Accepted Accounting Principles(GAAP) issued by the Financial
Accounting Standards Board (FASB) and enforced by the U.S. Securities and
Exchange Commission (SEC) and other local and international regulatory
agencies and bodies.
Throughput Accounting improves profit performance with better management
decisions by using measurements that more closely reflect the effect of
decisions on three critical monetary variables (throughput, investment (AKA
inventory), and operating expense — defined below).
Contents
[hide]

• 1 History
• 2 The concepts of Throughput
Accounting
• 3 Relevance
• 4 References
• 5 Category
[edit] History
When cost accounting was developed in the 1890's, labor was the largest
fraction of product cost. Workers often did not know how many hours they
would work in a week when they reported on Monday morning because time-
keeping systems were rudimentary. Cost accountants, therefore, concentrated on
how efficiently managers used labor since it was their most important variable
resource. Now, however, workers who come to work on Monday morning
almost always work 40 hours or more; their cost is fixed rather than variable.
However, today, many managers are still evaluated on their labor efficiencies,
and many "downsizing," "rightsizing," and other labor reduction campaigns are
based on them.
Goldratt argues that, under current conditions, labor efficiencies lead to
decisions that harm rather than help organizations. Throughput Accounting,
therefore, removes standard cost accounting's reliance on efficiencies in general,
and labor efficiency in particular, from management practice. Many cost and
financial accountants agree with Goldratt's critique, but they have not agreed on
a replacement of their own and there is enormous inertia in the installed base of
people trained to work with existing practices.
Constraints accounting, which is a development in the Throughput Accounting
field, emphasizes the role of the constraint, (referred to as the Archemedian
constraint) in decision making. [4].
[edit] The concepts of Throughput Accounting
Goldratt's alternative begins with the idea that each organization has a goal and
that better decisions increase its value. The goal for a profit maximizing firm is
easily stated, to increase profit now and in the future. Throughput Accounting
applies to not-for-profit organizations too, but they have to develop a goal that
makes sense in their individual cases.
Throughput Accounting also pays particular attention to the concept of
'bottleneck' (referred to as constraint in the Theory of Constraints) in the
manufacturing or servicing processes.
Throughput Accounting uses three measures of income and expense:

The chart illustrates a typical throughput structure of income

(sales) and expenses (TVC and OE).
T=Sales less TVC and NP=T less OE.

• Throughput (T) is the rate at which the system produces

"goal units." When the goal units are money [5] (in for-
profit businesses), throughput is net sales (S) less totally
variable cost (TVC), generally the cost of the raw materials
(T = S - TVC). Note that T only exists when there is a sale
 of the product or service. Producing materials that sit in a
warehouse does not form part of throughput but rather
investment. ("Throughput" is sometimes referred to as
"throughput contribution" and has similarities to the
concept of "contribution" in marginal costing which is
sales revenues less "variable" costs - "variable" being
defined according to the marginal costing philosophy.)
• Investment (I) is the money tied up in the system. This is
money associated with inventory, machinery, buildings,
and other assets and liabilities. In earlier Theory of
Constraints (TOC) documentation, the "I" was
interchanged between "inventory" and "investment." The
preferred term is now only "investment." Note that TOC
recommends inventory be valued strictly on totally
variable cost associated with creating the inventory, not
with additional cost allocations from overhead.
• Operating expense (OE) is the money the system spends
in generating "goal units." For physical products, OE is all
expenses except the cost of the raw materials. OE
includes maintenance, utilities, rent, taxes and payroll.
Organizations that wish to increase their attainment of The Goal should
therefore require managers to test proposed decisions against three questions.
Will the proposed change:
1. Increase throughput? How?
2. Reduce investment (inventory) (money that cannot be
used)? How?
3. Reduce operating expense? How?
The answers to these questions determine the effect of proposed changes on
system wide measurements:
1. Net profit (NP) = throughput - operating expense = T-OE
2. Return on investment (ROI) = net profit / investment =
NP/I
3. TA Productivity = throughput / operating expense = T/OE
4. Investment turns (IT) = throughput / investment = T/I
These relationships between financial ratios as illustrated by Goldratt are very
similar to a set of relationships defined by DuPont and General Motors financial
executive Donaldson Brown about 1920. Brown did not advocate changes in
management accounting methods, but instead used the ratios to evaluate
traditional financial accounting data.
Throughput Accounting [6] is an important development in modern accounting
that allows managers to understand the contribution of constrained resources to
the overall profitability of the enterprise. See cost accounting for practical
examples and a detailed description of the evolution of Throughput Accounting.
[edit] Relevance
One of the most important aspects of Throughput Accounting is the relevance of
the information it produces. Throughput Accounting reports what currently
happens in business functions such as operations, distribution and marketing. It
does not rely solely on GAAP's financial accounting reports that still need to be
verified by external auditors and is thus relevant to current decisions made by
management that affect the business now and in the future. Throughput
Accounting is used in critical chain project management (CCPM) [7], Drum
Buffer Rope (DBR) - in businesses that are internally constrained, Simplified
Drum Buffer Rope (S-DBR) [8] - in businesses that are externally constrained
particularly where the lack of customer orders denotes a market constraint, in
strategy, planning and tactics, etc.
[edit] References
1. ^ Eliyahu M. Goldratt and Jeff Cox - The Goal - ISBN 0-620-
33597-1.
2. ^ Thomas Corbett - Throughput Accounting - ISBN 0-
88427-158-7.
3. ^ Eric Noreen - Theory of Constraints and its Implications
for Management Accounting - ISBN 978-0884271161.
4. ^ John A. Caspari and Pamela Caspari - Management
Dynamics - ISBN 0-471-67231-9.
5. ^ Eliyahu M. Goldratt - The Haystack Syndrome (pp 19) -
ISBN 0-88427-089-0.
6. ^ Steven Bragg - Throughput Accounting - ISBN 978-0-
471-25109-5.
7. ^ Eliyahu M. Goldratt - Critical Chain - ISBN 0-620-21256-
X.
8. ^ Eli Schragenheim and H William Dettmer -
Manufacturing at Warp Speed - ISBN 1-57444-293-7
[edit] Category
Retrieved from
"http://en.wikipedia.org/wiki/Throughput_Accounting"

Categories: Management accounting

Personal tools
 • New features
•Log in / create account
Namespaces
• Article
• Discussion
Variants
Views
• Read
• Edit
• View history
Actions
Search
Top of Form
Special:Search

Search

Bottom of Form
Navigation
• Main page
• Contents
• Featured content
• Current events
• Random article
Interaction
• About Wikipedia
• Community portal
• Recent changes
• Contact Wikipedia
• Donate to Wikipedia
• Help
Toolbox
• What links here
 • Related changes
• Upload file
• Special pages
• Permanent link
• Cite this page
Print/export
• Create a book
• Download as PDF
• Printable version
• This page was last modified on 28 May 2010 at 00:20.
• Text is available under the Creative Commons Attribution-
ShareAlike License; additional terms may apply. See
Terms of Use for details.
Wikipedia® is a registered trademark of the Wikimedia
Foundation, Inc., a non-profit organization.
• Contact us
• Privacy policy
• About Wikipedia
• Disclaimers

Financial accounting

Hide links within definitionsShow links within definitions

Definition
Field of accounting that treats money as a means of
measuring economic performance instead of (as in cost
accounting) as a factor of production. It encompasses the
entire system of monitoring and control of money as it flows in
and out of the firm as assets and liabilities, and revenues and
expenses. Financial accounting gathers and summarizes
financial data to prepare financial reports such as balance sheet
and income statement for the firm's management, investors,
lenders, suppliers, tax authorities, and other stakeholders.
Rate:
management accounting
Hide links within definitionsShow links within definitions
Definition
Process of preparing management accounts that provide
accurate and timely key financial and statistical information
required by managers to make day-to-day and short-term
decisions. Unlike financial accounting (which produces annual
reports mainly for external stakeholders such as creditors,
investors, and lenders) management accounting generates
monthly or weekly reports for the firm's internal audiences
such as department managers and the chief executive officer.
These reports typically show the amount of available cash,
sales revenue generated, amount of orders in hand, state of
accounts payable and accounts receivable, outstanding debts,
raw material and in-process inventory, and may also include
trend charts, variance analysis, and other statistics. Also called
managerial accounting.

marginal costing
Hide links within definitionsShow links within definitions
Definition
Decision making approach in which marginal costs are used as
the basis for choosing which product to make or which process
to use. Also called incremental costing

budgetary control

Hide links within definitionsShow links within definitions

DefinitionMethodical control of an organization's operations
through establishment of standards and targets regarding
income and expenditure, and a continuous monitoring and
adjustment of performance against them.
Rate:
cash budget

Hide links within definitionsShow links within definitions

Definition:Financial plan that is a summary of estimated
receipts (cash inflows) and payments (cash outflows) over a
stated period. Two common methods of cash-budgeting are (1)
Adjusted net income approach and (2) Cash receipts and
disbursements approach.
fund

Hide links within definitionsShow links within definitions

Definitions (4)
1. Sum of money set aside and earmarked for a specified
purpose. See also funds.
2. Accounting entity (similar to a bank account) for recording
expenditures and revenues associated with a specific activity.
3. To finance or underwrite a business, program, or project.
4. Popular term for mutual fund
kaizen

Hide links within definitionsShow links within definitions

Definition:Japanese term for a gradual approach to ever higher
standards in quality enhancement and waste reduction,
through small but continual improvements involving everyone
from the chief executive to the lowest level workers.
Popularized by Mosaki Imai in his books 'Kaizen: The Key To
Japan's competitive Success.Rate:

backflush costing

Hide links within definitionsShow links within definitions

Definition:Method of costing a product that works backwards:
standard costs are allocated to finished products on the basis
of the output of a repetitive manufacturing process. Used
where inventory is kept at minimum (as in 'just in time'
operations) this method obviates the need for detailed cost
tracking required in absorption costing, and usually eliminates
separate accounting for work-in-process. Also called backflush
accounting.
Rate:

backflushing
Hide links within definitionsShow links within definitions
Definition:Process of determining the number of parts that must
be subtracted from inventory records. This number is
computed by referring to the number of parts withdrawn from
the inventory (and delivered to the shopfloor) and the number
of parts assumed (according to the bill of materials) to have
been consumed in a manufacturing line at one or more deduct
points.

target costing
Hide links within definitionsShow links within definitions
Definition
Product costing method in which a final cost is determined after
market analysis, and the product is designed or redesigned to
meet it. See also target cost.
activity based costing (ABC)

Hide links within definitionsShow links within definitions

Definition:Cost accounting approach concerned with matching
costs with activities (called cost drivers) that cause those costs.
It is a more sophisticated kind of absorption-costing and
replaces labor based costing system. ABC states that (1)
products consume activities, (2) it is the activities (and not the
products) that consume resources, (3) activities are the cost
drivers, and (4) that activities are not necessarily based on the
volume of production. Instead of allocating costs to cost
centers (such as manufacturing, marketing, finance), ABC
allocates direct and indirect costs to activities such as
processing an order, attending to a customer complaint, or
setting up a machine. A subset of activity based management
(ABM), it enables management to better understand (a) how
and where the firm makes a profit, (b) indicates where money
is being spent and (c) which areas have the greatest potential
for cost reduction. Developed by professors Robert Kaplan and
Robin Cooper of Harvard University in late 1980's.

MARGINAL COSTING VS. ABSORPTION COSTING:

A PARCTICAL PERESPECTIVE

P. K. Sikdar, Sr. Faculty EIRC of ICWAI

Marginal costing is also termed as variable costing, a technique

of costing which includes only variable manufacturing costs , in
the form of direct materials, direct labour, and variable
manufacturing overheads while determining the cost per unit
of a product. Where as Absorption costing, is a costing
technique that includes all manufacturing costs, in the form of
direct materials, direct labour, and both variable and fixed
manufacturing overheads, while determining the cost per unit
of a product. It is also referred to as the full- cost technique.

In the costing of product/service, a marginal costing technique

considers the behavioural characteristics of costs (segregations
of costs into fixed and variable elements), because per unit
variable cost is fixed and total costs are variable in nature,
where as total fixed costs are fixed and per unit fixed cost is
variable in nature and furthermore variable costs are
controllable in nature, while total fixed costs are un-controllable
in nature. Marginal costing is useful for short-term planning,
control and decision-making, particularly in a business where
multi-products are produced. In marginal costing technique, the
contribution is calculated after deducting variable costs from
sales value with reference to each product or service, in order
to calculate the total contribution from all products/services
which are made towards the total fixed costs incurred by the
business. As the fixed costs are treated as period costs, are
deducted from total contribution to arrive at net profit.

In the context of costing of a product/service, an absorption

costing considers a share of all costs incurred by a business to
each of its products/services. In absorption costing technique;
costs are classified according to their functions. The gross
profit is calculated after deducting production costs from sales
and from gross profit, costs incurred in relation to other
business functions are deducted to arrive at the net profit.

Absorption costing gives better information for pricing products

as it includes both variable and fixed costs.

Marginal costing may lead to lower prices being offered if the

firm is operating below capacity. Customers may still expect
these lower prices as demand/capacity increases.

Profit Statements under Marginal and Absorption

Costing:

The net profit shown by marginal costing and absorption

costing techniques may not be the same due to the different
treatment of fixed manufacturing overheads. Marginal costing
technique treats fixed manufacturing overheads as period
costs, where as in absorption costing technique these are
absorbed into the cost of goods produced and are only charged
against profit in the period in which those goods are sold. In
absorption costing income statement, adjustment pertaining to
under or over-absorption of overheads is also made to arrive at
the profit.

Terms explained:

Product and Period Costs:

1 Product costs: the costs of manufacturing the products;

2 Period costs: these are the costs other than product costs
that are charged to, debited to, or written off to the
income statement each period.

A Case Example on Marginal and Absorption Costing:

Data for a Quarter for a manufacturing company:—

Level of Activity 60% 100%

Sales and Production(Units) 36,000 60,000
Rs. Rs.
(’000) (’000)
Sales 432 720
Production costs :
 (Variable and fixed) 366 510
Sales, distribution and
administration costs
126 150
(Variable and fixed)

The normal level of activity for the current year is 60,000 units,
and fixed costs are incurred evenly throughout the year.

There were no stocks of the product at the start of the quarter,

in which 16,500 units were made and 13,500 units were sold.
Actual fixed costs were the same as budgeted.

Then, various calculations regarding Absorption vs. Marginal

costing can be worked out as under:—

Production Sales etc

Costs (Rs.) costs (Rs.)

Total costs of 60,000 units 5,10,000 1,50,000

(fixed plus variable)

Total costs of 36,000 units 3,66,000 1,26,000

(fixed plus variable)

Difference = variable costs of 1,44,00 24,00
24,000 units 0 0
Variable costs per unit Rs.6 Re.1
Producti Sales etc.
on
Costs (Rs.)
Costs
 (Rs.)
Total costs of 60,000 units 5,10,00 1,50,000
0
Variable costs of 60,000 units 3,60,00 60,000
0
Fixed costs 1,50,00 90,0
0 00

The rate of absorption of fixed production overheads will

therefore be:

Rs.1,50,000 ÷ 60,000 = Rs. 2.50 per unit.

(i) The fixed production overhead absorbed by the products

would be 16,500 units produced × Rs. 2.50 = Rs.
41,250

(ii) Budgeted annual fixed production overhead = Rs.1,50,000

Rs.
Actual quarterly fixed production overhead = budgeted 37,5
quarterly fixed 00

production overhead (1,50,000 ÷ 4)

Production overhead absorbed into production [see (i) 41,2
above] 50
Over -absorption of fixed production overhead 3,75
0
(iii) (a) Profit statement for the quarter, using
Absorption Costing

Rs. Rs. Rs.

Sales (13,500× Rs.12) 1,62,0
00
Costs of production (no opening stocks)
Value of stocks produced (16,500 × Rs. 1,40,2
8.50) 50
Less value of closing stock
(3,000 units × full production cost of Rs. (25,50
8.50) 0)
1,14,7
50
Sales etc costs
Variable (13,500 × Re. 1) 13,5
00
Fixed (1/4 of Rs. 90,000) 22,5
00
36,00
0
Total cost of sales 1,50,7
50
Less over-absorbed production overhead 3,750
1,47,0
00
Profit 15,00
0
(b) Profit statement for the
quarter using Marginal Costing
Rs. Rs.
Sales (13,500×Rs.12) 1,62,0
00
Variable costs of production (16,500 × Rs. 6) 99,0
00
Less value of closing stocks (3,000 × Rs. 6) 18,0
00
Variable production cost of sales 81,0
00
Variable sales etc. costs (13,500 × Re.1) 13,5
00
Total variable cost of sales (13,500 × Rs. 7) 94,50
0
Contribution (13,500 × Rs. 5) 67,50
0
Fixed Costs: Production 37,5
00
Sales etc. 22,5
00
60,00
0
Profit 7,500

Conclusion: Hence, Profits as shown by Marginal and

Absorption Costing techniques are not the same, due to the
reasons explained above.