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Absorption cost
Absorption, or full cost systems, transfer the full cost of the supplying department to the receiving department. Where a profit is to be allowed to the supplying division, it is necessary to determine a policy which can be consistently applied. Typical systems may allow a profit based on cost, sales or investment.
Variable cost
Variable cost based systems overcome the decision-making problem of full cost system. Transfers from one division to another are made at variable cost. Standard variable cost overcomes the problem of passing on inefficiencies and diseconomies from division to division.
There are two ways by which profits can be created at a divisional level. The first approach is to apply the principles illustrated in A to marginal costing. Transfer pricing schemes would allow a suitable level of contribution, as measured in terms of contribution on sales ratio. An alternative approach is to create a two-part charging system. One part of the scheme would transfer a lump sum, representing an allowance for divisional fixed cost once a year to allow each division the chance of creating a final profit. The second part of the scheme would value transfers at variable cost.
Standard costing system However, it has been argued that traditional variance analysis is unhelpful and potentially misleading in the modern organization, and can make managers
underlying assumptions of breakeven analysis and the limitations of this.
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marginal costing decision making assignment questions
.1 You are the Management accountant of an industrial concern and have been assigned the duty of preparing a cost accounting system. Initially it has been decided to prepare three
Explain TWO limitations of using accounting ratios to assess the performance of a firm and suggest how each limitation may be improved
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