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Financing and cost accounting

2.3 Standard costing systems

System What it does When its best used Main problems

Marginal costing Includes only For short term Doesn’t include
variable production decision making fixed overheads
costs

Absorption Includes all For long term Overheads are not
costing production costs pricing decisions broken down
when overheads are
Allocates overheads mainly driven by The basis for
to products on the labour hours (e.g. sharing overheads
basis of direct for hand-made between products is
labour hours goods) unrepresentative

Makes cost control
difficult

Activity based Allocates overheads When overheads For long term
costing to products based are substantial and pricing and cost
on activity levels are driven by activity control in non-labour
other than labour intensive
hours manufacturers

Illustrations and further practice

Now try TYU question 5.

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